Jan Cienski in Warsaw -

Poland's government has received an unexpected bonus from the global economic crisis - a much cheaper-than-expected resolution to the decade-long fight with Dutch insurer Eureko over PZU, Poland's largest insurance company, and thus more hefty dividends to fill up the government's empty coffers.

On October 8, Poland's Treasury announced that it and Eureko, the two main shareholders in PZU, had agreed to vote in favour of dividend payouts from PZU at 25-45% of the company's net profits each year before an IPO is held by the end of 2011. The government is desperately tapping state-controlled companies for cash in order to shore up its finances, which have been stretched by the crisis. Because of the 10-year fight between the Treasury and Eureko, PZU had not paid out a dividend since 2006 and was sitting on a cash pile of PLN12.7bn.

The resolution of that longstanding dispute came a week earlier when Eureko - which is having a difficult downturn, reporting a loss of €2.1bn last year - decided to plump for the offer put forward by Aleksander Grad, Poland's treasury minister, which handed the Dutch walking away money of PLN4.8bn (€1.1bn), much less than they had been hoping for. "It is the end of their strategic goal, which was clear - to take control of PZU," said an exhausted but ebullient Grad a day before the deal was officially announced on October 1. "Negotiations have resulted in the opposite outcome."

It was a remarkable climbdown for the Dutch company, which had been holding out for PLN36bn in penalties from the Polish government, as well as control of PZU. The result was much better than many observers had expected. The day before the deal, Polish newspapers were predicting Eureko would receive a pay-off of anywhere from PLN8bn to PLN15bn, and the Polish currency sagged amid fear the sum would blow a hole in the already strained budget. There were also worries that Eureko would flood currency markets with zlotys as it converted the windfall into euros. In the event, the zloty firmed sharply immediately after the deal was announced, as it turned out the impact of the payment would be a lot smaller than expected.

Troubled marriage

Eureko's dalliance with PZU began in 1999, when the centre-right Polish government of the time chose the little known Dutch company to buy a third of the country's largest insurer. Government policy at the time was to try and get rid of inefficient state-run companies, and was selling off banks, telecommunications companies and other assets to foreign investors.

In 2001, the government, which owns 55% of PZU, agreed to float the insurer on the Warsaw Stock Exchange and to sell Eureko the 21% it needed to take control. Almost immediately after that decision, subsequent Treasury ministers began trying to back away from that promise. The environment had changed, and the idea of selling off state champions to outsiders was no longer in favour. However, the Dutch refused to let go of their prize, and took the Polish government to an international arbitration tribunal, which ruled that Warsaw had violated the terms of a Polish-Dutch investment protection treaty.

The Polish government fought back fiercely, even creating a parliamentary commission to investigate whether there had been any improprieties in the privatisation of PZU. The previous Law and Justice party government went to war with Eureko, fighting over who would be allowed to serve on the board. But the Dutch stood firm, claiming damages of PLN36bn, as well as the right to buy the promised 21% of PZU for 2001 prices, which Grad claimed would have given Eureko an immediate gain of PLN6bn.

When the current centrist Civic Platform party government took power in 2007, Grad tried to tackle the Eureko issue several times, but without success. Initially, the Dutch felt confident because the international arbitration panel had already ruled in their favour, and was preparing to set out the amount of damages owing by the Polish government. But when the crisis hit, Poland's negotiating position strengthened. Although Eureko was hoping for an enormous payout, the prospects of getting money in the immediate future were very remote.

However, because of the fight between the Treasury and Eureko, PZU had not paid out a dividend since 2006, and was sitting on a cash pile of PLN12.7bn. Those funds will be tapped to end the dispute. Under the agreement, Eureko will get an immediate payment of PLN3.55bn for the government's share of PZU's dividends. The state budget will get an additional PLN3.4bn in dividends, which will help patch up this year's budget deficit.

Eureko also gets an additional PLN1.2bn when 4.9% of PZU shares owned by the government are sold in an IPO, something that could happen as early as next year. The deal also calls for Eureko to unwind its holdings in PZU to a level below 13%. "This was an enormous success for Grad, whatever else he's been able to accomplish as minister," says Marek Belka, a former prime minister who had tried to negotiate a compromise with Eureko in 2004 that ended up being killed in parliament.

It is also a success for the management of PZU, which will now be freed from the war conducted by its two leading shareholders. "PZU will become a normal company," Anrdzej Klesyk, PZU's CEO, tells bne.

His plan is to use the PLN5bn left to PZU after the dividend payout, as well as money earned this year - which could break previous profit records - to retain PZU's 40% market share in Poland and to go hunting for acquisitions elsewhere in Europe. "I can imagine PZU taking over western companies," he says.

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