Karol Chrystowski, Renaissance Asset Managers -
The day in April 2007 that European football's governing body UEFA picked Poland and Ukraine to host the Euro 2012 championships was a shock. Few had predicted these two eastern European countries would share the honour of holding the most important football tournament in Europe, as most assumed they would never be able to bring their infrastructure up to scratch in time.
Even the stock markets were caught off guard: all Polish infrastructure stocks (Ukraine doesn't have listed infrastructure companies) shot up by anything from 10% to 50% after the news broke. And these stocks were not undervalued, having already enjoyed a relentless three-year bull run. Most of these stocks were actually significantly overvalued on any fundamental metric; all the "blue sky" scenarios were already priced in.
Building the infrastructure for Euro 2012 should have created a plethora of opportunities beyond what even the most optimistic investors could dream of. The scale of work needed to get the two countries ready was simply mind-boggling: Poland alone spent some €25 billion on getting ready for the event. Obviously, the motorways, rail links, airports etc. built will serve the country way beyond the three-week football-fest and the preparatory construction has spilled over to lift the sector as a whole.
But the championships didn't turn out to be quite the boon they should have been. The day UEFA announced the winning bids marked the start of a very bleak period for developers. The share price of the majority of the companies went into freefall over the subsequent five years. The more contracts they took on, the lower their share prices fell. It's symbolic that on June 4, only four days before the great event literally kicked off, the main Polish company involved in stadium and motorway construction, PBG, filled for bankruptcy.
Typically, the main problem wasn't on the revenue side of the business. Poland-bulls emphasize infrastructure spending in Poland is not only guaranteed by the state (which, unlike most of its western peers, enjoys a fairly healthy sovereign debt profile), but is also heavily supported by EU cohesion funds. On top of this, there are several multi-billion euro and multi-year energy contracts that Poland has no choice but to implement, as it is running out of spare capacity. In short, Poland represents one of the safest top-down pictures one can think of. But the top-down picture is immaterial if you can't get the bottom-up implementation right.
The founder and CEO of PBG, Jerzy Wisniewski, said in July in an interview with Forbes magazine after the company collapsed: "We were surprised by one-off events like substantial increases in commodity prices which we couldn't predict at the bidding stage."
Well, we all have to live with uncertainty, a phenomenon neatly summarised by Benjamin Franklin in a letter to Jean-Baptiste Leroy: "In this world nothing can be said to be certain, except death and taxes."
What you can do, however, is prepare for a wide range of outcomes - and this also applies to large corporations. Companies need to conduct in-depth analysis that doesn't just count the paper clip usage, but works out if the people in charge are on top of the key risks facing the business. The point is not just to build a lot of roads, rail links and large stadiums - but to build them at a profit.
Despite the problems, Euro 2012 was surprisingly successful. The visitors were amazed by the high-tech stadiums, smooth organisation, security and handling of excessive traffic. And they were pleased by the friendly and cheerful hosts in both Poland and Ukraine, despite the international press' best efforts to paint Ukraine as a country overrun by murderous racists.
Euro 2012 will go a long way to undoing some of the deeply ingrained stereotypes of eastern Europe, and it is uplifting to see that the region can deliver some large positive surprises - especially when expectations are rock bottom. The top-down picture gives us confidence that the region will progress. It's whose doing the bottom-up work that will determine the companies that will benefit from the progress.
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