After suffering a drought of new issues since the 2008 global financial crisis, Prague Stock Exchange (PSE) was rocked in April by the announcement of two giant initial public offerings (IPOs) in the space of just one week.
US giant GE Capital and local energy holding EPH hope to float shares worth close to CZK75bn (€3.3bn) on the bourse – equivalent to almost half the total turnover last year. Both offers should take place by the end of June, although GE will hold on to a minority stake in Czech unit GE Money Bank (GEMB) for at least six months and perhaps as long as two years.
There are advantages to the pair's offers that could help grease the wheels. The assets themselves look stable and profitable, suggest analysts, while the current low yield environment could also help them convince investors. However, the first firm pricing information, revealed by GE on April 25, was significantly below early estimates, suggesting there is some concern that the sales could struggle.
But amid near-zero or negative yields on government bonds, the plans announced in mid-April by GE and EPH to float stakes in their respective Czech and Slovak businesses could be just what the investor ordered: dividends. To draw in investors looking for higher returns, both GEMB and EPH's unit EP Infrastructure (EPIF) have pledged to pay out more than half of their profits to investors.
The back-to-back announcements certainly caused quite a stir around the sleepy Prague bourse, which has seen at most one IPO per year since the global crisis. Ahead of setting the price range, investment banks preparing EPIF’s float have valued the company at CZK135-210bn (€5bn-7.6bn), according to Hospodarsky Noviny, citing unnamed sources. That suggests the planned dual listing of a 15% stake in London and Prague could raise up to CZK31bn.
Josef Nemy at Komernci Banka tells Investicni Web he’s optimistic. “After many rather slow years, I’d even say that this could mark a renaissance for the PSE,” he said. “Practically the only disadvantage of the new issues is that they will further increase the already high exposure the PX index has in the financial and energy sectors.”
GE will seek a valuation of CZK35bn-43bn (€1.3bn-1.6bn) for the IPO of its Czech lender, a company statement announced on April 25. After more than a year of trying to sell the sixth biggest bank in the Czech Republic by assets, GE surprised earlier this month when it announced plans to list the entire bank in Prague.
Speculation remains that the move may actually be intended to nudge strategic investors into raising their bids.
“There has been/is lots of interest in GEMB,” asserts one Prague-based M&A lawyer to bne IntelliNews. “It’s either a fake to push those suitors into action – which wouldn’t be the first such instance in this country – or the underwriters have somehow managed to persuade GE that they will get a better price by floating in Prague. I can’t believe they believe they can push through a deal with the whole bank being listed on a barely functioning capital market.”
However, the pricing range announced by GE suggests it’s the latter scenario that is in play. The bank will offer 260.61mn shares, constituting a 51% stake, in a first round sale. Final pricing is expected on or around May 5, with conditional trading starting the following day. GE Capital says it will keep a remaining 49% stake for at least six months, and then gradually exit over the following two years.
The bank issued an initial price range of CZK68-85 for each of the 511mn shares it plans to eventually sell on the Prague bourse. At the mid-point, that implies a market capitalisation of CZK39bn, the statement points out. At the upper end of the range it would offer a valuation of CZK43bn.
Analysts had earlier suggested the IPO could seek a valuation of CZK40bn-60bn. Unnamed sources from the investment banks preparing the offer – Goldman Sachs, J.P. Morgan, Citigroup and Wood & Co. – later added weight to those estimates as they told local press the offer could raise up to CZK40bn-56bn.
The mid-point of the actual pricing range would clearly fall close to the bottom of the estimate range. The price is “slightly lower than we had originally expected, which could make the shares attractive for investors,” analysts at J&T Banka said in a note.
The bank has an equity value of CZK27.3bn, GE Money Bank said during its original announcement of the IPO, but ahead of the deal it will pay a CZK4.5bn dividend to GE Capital International.
Analysts note the current risks of the low interest rate environment and rising competition but also suggest the bank is interesting thanks to its offer of exposure to reviving Czech consumption. Around 37% of the GEMB’s portfolio consists of consumer loans. Net profit rose 4.6% CZK4.5bn last year. The bank says it will maintain a dividend policy of paying out a minimum of 70% of income.
If successful, GEMB will join Komercni Banka, Erste Bank and Vienna Insurance Group (VIG) on the PSE, granting the financial sector a huge weighting and increasing competition for investor interest.
All the financial stocks should benefit from the current domestic consumption boom but GEMB may stick out as the only lender not controlled by a large Eurozone banking group. While Czechs have rushed to spend over the past couple of years, pushed by economic growth that peaked above 4% last year, a slowdown to around 2.5% is expected in 2016 and for next year.
For EPIF – a unit spun off closely-held Czech/Slovak EPH which contains the Slovak gas network, as well as distribution and storage assets in the Czech Republic – dividends will also be a draw.
“Dividends are probably the most important issue in the current yield environment for energy companies,” says one Central European energy analyst for an international investment bank, who asked not to be named.
That begs the question of just how steady the high dividends promised by EPH could prove. Like GEMB, EPIF is a profitable, major player in its sector, and enjoys steady revenue streams.
Some analysts see a plus side to the energy unit due to the regulated nature of around half of its portfolio. Many of its businesses sell and distribute gas in the Czech Republic and Slovakia. Regulated utilities have outperformed energy producers significantly on European markets since the financial crisis, the Financial Times noted recently.
“Many investors will see EPIF as an interesting alternative to CEZ, three-quarters of which is unregulated and also impacted by falling commodity prices,” Erste Bank analyst Petr Bartek said in a survey of analysts by Investicni Web.
However, even this part of the business is not without risk. Bartek points out that the unit “has relatively high debt ... and may also suffer from falling government bond yields, which often serve as the basis for calculating the regulated rate of return.”
“There’s both big opportunity and risk,” says the energy analyst. In particular, he cites Hungary, where the government has spent the past few years pushing regulated prices sharply lower to create a “non-profit” utilities sector. As in Budapest, there is a strong populist bent to the government in Bratislava.
The key is EPH’s close working relationship with the Smer party, which leads Slovakia’s new coalition. “Good relations with the government are a must for the well-being of any bigger energy company in Slovakia - as Enel learned the hard way during the last three years or so,” Martin Vlachynsky at the Institute of Economic and Social Studies (Iness) notes to bne IntelliNews. “That means generous dividends [dividends from co-owned energy companies constitute about 3% of the state budget] and as little price increases for households as possible.”
The state owns 51% of EPIF’s biggest asset: Eustream. However, the fate of the Slovak transmission system operator is not in Bratislava’s hands. In some ways, the IPO could be seen as a test of how seriously western investors view Russian threats to divert Europe's gas supply to Nord Stream II. Anyone that takes the Kremlin’s vow that it will bypass Ukraine’s gas system by 2019 at face value will likely stay well clear of EPIF, which makes around half of its revenues meeting Gazprom’s exports on the eastern Slovak border to carry them to Austria.
The energy analyst says he is “virtually certain” Moscow will still be sending gas via Ukraine in 2020. The ongoing fight over Russia’s alternative plan – to build Nord Stream II to carry more gas directly to Germany – means that project is stuck for some time, he says.
However, the Kremlin’s central role in the fate of EPIF clearly makes it a huge bet. Although Eustream told bne IntelliNews last year that it has a “ship or pay” clause in its contract with Gazprom, that could be tough to enforce, suggests Vlachynsky. “The contract with Gazprom should last until 2028,” he notes. “I don’t dare predict the outcome of any legal clashes resulting from [a cut to gas flows] but obviously, it would be no good for investors.”
Eustream is also pushing to create an alternative role to pipe EU gas to the Balkans but the Eastring project is also anything but certain. “Eustream is hoping to offset this risk with Eastring, but if it does not get financial support from EU [which is far from guaranteed] its future is uncertain,” the Iness analyst adds.
A little extra
On top of all that, EPH’s offer could also suffer infection from the last major IPO on the Prague bourse. The float of Central European hard coal and coke producer New World Resources (NWR), which raised GBP1.1bn (€1.4bn or CZK38bn at current prices) in Prague and London in May 2008, was also an energy offer made by oligarchs with little track record of transparency It has not ended well – at least for anyone except billionaire Zdenek Bakala.
The IPO price in Prague was CZK425.83; the stock is nearly worthless today, trading at CZK0.17 on April 22. NWR’s new owners, a trio of bondholders called the Ad Hoc Group (AHG), are desperately pushing for a Czech government bail-out to prevent a disorderly bankruptcy following the exit of Bakala, who was recently compared by President Milos Zeman to convicted fraudster Viktor Kozeny, the notorious “Pirate of Prague”. AHG is now desperately trying to squeeze €150mn out of the government for the company.
Investors that lost their shirts on NWR would struggle to claim there was no warning of the risks. There was plenty of speculation surrounding the terms under which Bakala bought the company, and he has remained in the headlines in the Czech Republic for extracting huge volumes of cash out of the business.
Daniel Kretinsky and Patrick Tkac – the oligarch owners of EPIF parent EPH – are hardly known for their openness either. What they do clearly have is “clout,” as the energy analyst puts it. But so did Bakala in 2008; however, the wind has since changed.
As ever, though, it’s the bottom line that will likely dictate whether or not investors are ready to take on such a risk.
“It all depends on the valuation,” smiles the M&A lawyer. “If they just try to get a 10% premium then they’ll probably get some institutions in London to invest. If they try to triple the price, then …”
“Energy isn’t the sexiest sector currently,” the energy analyst says, “so they may need to offer the market a little extra.”