Patricia Koza in Warsaw -

Poland described as "premature" the European Commission's criticism of its plans to privatize the Warsaw Stock Exchange (WSE) by selling stakes exclusively to domestic institutional investors, which would contravene EU rules. But analysts say the idea the WSE will be sold at all is probably premature as well, given this government’s hostility to privatization.

The Treasury has confirmed to it's working on a plan under which Polish institutional investors – financial institutions, investment funds and pension funds – would be invited to buy packages of 5% to 10% of WSE shares. The state would retain 51%.

The WSE's stock rises

But the office of the EU internal market commissioner, Charlie McCreevy, has weighed in with a warning that any partial privatisation of the WSE would have to comply with EU rules.

"The basic principles of European law cannot be violated, like equal treatment of investors, for example," McCreevy’s spokesman Oliver Drewes told bne on Thursday. Drewes cautioned that while "there is nothing concrete" yet from Poland on which to comment specifically, "we’re monitoring the situation."

Treasury Ministry spokesman Pawel Kozyra described the plans as "preparatory" and emphasized no final decisions have been made. "The statements by the European Commission are premature," he said in a statement in response to questions from bne.

Poles apart from the EU

If the plans do go ahead, it would enmesh Poland in yet another dust-up with the EU. Poland is already under threat of legal action from Brussels for fining dominant telecommunication provider TPSA a record €87m for broadband services that the EC says are not subject to regulation. Last year, Poland crossed swords over the issue of cross-border mergers involving Italian UniCredit Group’s takeover of a Polish bank, and in 2005 it fought against several clauses of the proposed EU constitution.

But some analysts say for all the smoke, they see no fire. The centre-left government of Jaroslaw Kaczynski is no fan of privatisation and has blocked the sale of several state-owned companies that were in the final stages of turnover to foreign investors.

"I think this whole concept may basically lead nowhere," says Dariusz Gorski, chief analyst at Deutsche Bank. "This is not a foreign-investor friendly government."

Certainly, the Warsaw exchange does not fall into the category of a struggling industry that the state, which owns almost 99% of it, would want rid of.

The WSE is by far the largest of the bourses established in Central and Eastern Europe after the collapse of communism in 1989. The 287 companies listed on the main and parallel markets have a market capitalization exceeding €165bn on the thriving bourse, a value which soared 58.9% in 2006 alone. Since 2004, the number of new listings has outpaced that of all European exchanges but London’s, with the single exception of Oslo in 2005.

The exchange is aggressively promoting foreign business as part of its expansion strategy in Eastern Europe, ruffling feathers by encroaching on the traditional territory of such exchanges as the Vienna Boerse and the Scandinavian-Baltic OMX. Under its so-called "IPO Partner programme," the WSE supports canvassing and promotional activities by cooperating brokerages and consulting firms abroad with the aim of luring foreign companies to its exchange. It has already attracted 13 foreign. (To read more click here)

But if Poland were forced by the Commission to yield WSE shares to all comers, including foreigners, "Quite honestly, the Austrians would be interested in buying," reckons Gorski. "That would be very high on their agenda. And the Poles are aware of that; they would not risk having this market taken over by the Austrians."

The Vienna bourse, which has acquired 68% of shares in the Budapest Stock Exchange (BSE), is Warsaw’s closest rival in Central Europe. Its strategy has been to develop cooperation agreements with CEE exchanges in areas such as product development.

Rather than be bought, the Warsaw exchange is actively seeking foreign acquisitions. On Wednesday its president, Ludwik Sobolewski, said the WSE hopes to buy up a 44% stake in the Bulgarian Stock Exchange or become its partner in a regional stock exchange. The Bulgarian Stock Exchange has already drawn interest from Scandinavia’s OMX, Germany’s Deutsche Boerse, Italy’s Borsa Italiana and Greece’s Hellenic Exchange Holdings.

Sobolewski also confirmed the WSE is interested in acquiring a majority stake in Slovenia's Ljubljana Stock Exchange. Warsaw expects to place both bids by mid-March.

The privatisation plans are being drawn up by a consortium of McKinsey Co., Pekao SA Brokerage and Ernst & Young, which was awarded the tender in April 2005. The task included a legal analysis of the WSE, prospects for development, the influence of the WSE on the development of the Polish capital market, valuation issues, and preparation of several strategic variants for privatisation in cooperation with the Treasury.

The option of letting it fall into the hands of foreigners is unlikely to be the preferred one.

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