Ben Aris in Berlin -

In an exclusive interview with bne, Chairman of the Warsaw Stock Exchange Ludwik Sobolewski effectively dashed hopes of a pan-Central European stock market based on untied local exchanges by saying he's looking to strike up a partnership with one of the international exchanges.

For years the bosses of some of the stock markets in Central and Eastern Europe have dreamed of building a single exchange that would allow investors to trade shares from Tallinn to Ljubljana. The idea is to retain domestic autonomy for local investors, but then to create some sort of meta-platform that would allow Czech investors to buy Romanian shares in Prague and vice versa.

Warsaw is the key to creating this market. With a market capitalisation of about €150bn and €2.5bn of IPOs in the first half of this year - already more than all the floatations in 2006 - the WSE dwarfs all the other exchanges in the region and is even poised to overtake some Western rivals; Vienna Bourse has a market capitalisation of €200bn, but has only a third as many companies listed on it.

As valuations on all the markets in the region continue to rise steadily, the bigger exchanges surrounding Central Europe are preparing to move in. Both the Scandinavian exchange OMX and the Western European exchange Euronext have made offers of marriage to WSE, but so far have been rebuffed. But a deal is drawing close, says Sobolewski.

"I can't exclude an alliance or close cooperation with one of our competitors - I consider Euronext and OMX both as very attractive partners. I don't think we have many other alternatives that can reach the same objectives," says Sobolewski. "I see little chance for the WSE if it stays totally independent [and] if one is not building up an international market. We can't remain a local exchange."

Political delays

However, any tie-up will have to wait a little until the political turmoil in Poland dies down. The Polish government has decided, in principle, to sell the WSE, but the decision still needs to be pushed through parliament, which has other things on its mind at the money, says Sobolewski.

"There is a privatisation plan concept for the WSE and we intend to open up our shareholder structure, but now the problems with the political situation have slowed the process, as this is a decision that needs a certain amount of political will," he says.

As the prospect of a pan-regional union of all the small exchanges in the region fade, the stock markets in countries like Czech Republic and Hungary will have to rethink their future. The WSE's rebuff will also come as an especially hard blow to the Vienna Bourse, which was hoping to take the lead in the consolidation; Vienna Bourse has already bought into Budapest Stock Exchange and was revving up to bid for WSE in any privatisation. But it seems the deal has been too long in coming and, in the meantime, the WSE is on the point of outgrowing its would-be bride.

"The Vienna Bourse is bigger in terms of market capitalisation, but the difference is not big," says Sobolewski. "However, the WSE already has three times the number of listed companies. Vienna has a higher volume of trade, but the dynamics of growth are better at the WSE as we have a bigger economy. If we don't make any mistakes, we will soon become the most important market in Central Europe, so I would rather think about a partnership with one of the international exchanges, rather than a regional exchange," says Sobolewski.

Poland's unstable political situation means a deal is still a little way off, but Sobolewski says in any case there is more work to do in developing the structure of the market before he is ready to deal. A wave of IPOs has swept through Central and Eastern Europe - with Poland and Russia being a clear head in front of the other markets - but analysts say the trend is only just starting to gather momentum. Most of the IPOs are still happening on domestic markets, with a few exceptionally big companies choosing to list in London, but the WSE wants to make itself the default choice for Central European companies looking to sell shares.

"We want to attract companies from across the region. Once we have more liquidity and absorb more capital the effect will be to pull in more companies who want to enter the WSE," says Sobolewski.

He warns that the WSE is surrounded by big players like the LSE and OMX, which are all competing to attract those companies that are listing in Warsaw. "More and more of the competition is interested in what is going on in Poland," he says.

And progress has been good. Last year 38 companies listed on the WSE, raising a total of about €2.5bn, including six companies from neighbouring countries. This year the exchange has already become home to another 43 listed companies in just the first six months of this year, raising about the same amount. Sobolewski expects some 60-70 companies to have floated by the end of this year, including half a dozen foreign companies.

The first Ukrainian company listed last year. Ukrianian Astarta Kiev, a large agro-holding mainly focused on sugar production, floated 5% on the WSE almost exactly a year ago on August 17 and raised $31.7m. Investors from across Europe bought the stock, but the real appeal of Warsaw-based listings is the market is backed by a well developed profile of domestic and foreign investors that no other market can boast.

Successful social and pension reforms mean domestic institutional investors already account for a third of the money invested into equity on the WSE, with private individuals accounting for another third and the rest made up of foreign investors. The WSE has also been busily signing up brokers in other markets including London, which accounts for about 80% of all the foreign investment, or 10% of the total turnover, up 10-fold on the level in 2006.

"We have developed this structure over the last few years and it already lends stability to the market. There is a strong domestic investor base and this is attracting more international investments," says Sobolewski. "We also have a network of IPO partners - banks and brokerages in other countries - that can arrange an IPO on the WSE for these foreign companies."

And it is relatively cheap. The cost of a Warsaw listing is typically 5-7% of the company's valuation at the time of the float, which is 3-4 times cheaper than floating on London's Alternative Investment Market (AIM) - a popular venue for many companies in Central and Eastern Europe looking to list.

Indeed, not only is the cost of a Warsaw IPO attractive, but Sobolewski says the WSE is a more appropriate venue for CEE companies, who can get swamped by the sheer number of companies that are listed on AIM. He claims that leading Ukrainian real estate developer XXI Century is thinking about moving its listing from AIM – or at least organising a dual listing – as the company's owners are not satisfied with the volume of trade their company's stock has or the profile it enjoys on the London market.

Despite its success, the WSE still has its work cut out. Last year, the IPO of Czech utilities company CEZ was a huge success, but the exchange will see few more floatations of this size. Small- and medium-sized enterprises dominate the IPOs and this year has seen a string of real estate companies offerings. Hoping to capitalise on this trend, the WSE will open a new market specifically targeting SMEs and start-ups that are looking for expansion capital; the "New Connect" alternative market will be launched on August 30 and between five and six companies will debut on the first day of operations.

"New Connect is even cheaper and more open than the main market," says Sobolewski. "We are hoping it will be a real boon for smaller Polish companies looking to tap the domestic capital market for money."

But investors are eagerly looking forward to next year when the privatisation of Polish power companies are supposed to start, with some of the shares of these giant energy firms expected to be floated on the WSE.

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