As stock market officials, journalists and the team responsible for the Digi Communications IPO gathered at the Bucharest Stock Exchange (BVB) for the launch of trading on May 16, one of the advisers clustered at the back of the room was overheard commenting that it had been “a hell of a ride”.
To the challenges of carrying out Romania’s largest-ever private sector IPO was added the announcement of a corruption probe into Digi’s main subsidiary RCS&RDS part way through the offer period. Despite this hiccup, the entire offer of shares was sold, and the RON950mn (€209mn) offering beat the previous record set by healthcare company Medlife in December 2016.
Admittedly, at RON40 (€8.78), the price was towards the lower end of the range included in the IPO prospectus, and while Digi was a resounding success among retail investors, some institutional investors are believed to have been put off by the news of the National Anticorruption Directorate (DNA) probe concerning broadcast rights for football matches. The day after the launch of trading, the DNA announced it had extended its investigation to RCS&RDS CEO Serghei Bulgac, and the share price closed the day 4.1% down.
Nonetheless, the European Bank for Reconstruction and Development (EBRD) confirmed to bne IntelliNews that it had carried through with its bid to buy 3.25mn shares (3.25% of total shares), helping to boost investor confidence in the company, and other investors seem to have taken the same approach.
Speaking shortly before the trading bell rang on May 16, Bucharest Stock Exchange (BVB) CEO Ludwik Sobolewski referred to the investigation obliquely as he congratulated Bulgac and his colleagues on the successful listing.
“This happens to be the largest IPO conducted by a completely private company in the history of the Romanian stock market,” he said as the stock price started to scroll on the screen behind him.
“This transaction was closed against some headwind ... but the real strength and growth comes through continuous efforts and facing tough challenges that can be all of a sudden appearing around us. I think this is a good perspective for the shareholders of this company.”
Within Southeast Europe, Romania has been the exception that proves the rule. Outside Romania – with its more developed capital market and strong pipeline of companies for privatisation – the small stock exchanges’ shallow markets attract relatively little investor interest. But even the Bucharest exchange struggles with low liquidity.
Yet that situation looks like changing now, with the listing of Slovenia’s Nova Ljubljanska banka (NLB) potentially paving the way for more IPOs of state assets on the local exchange, while planned regulatory changes in Bulgaria could open up a pipeline of IPOs by energy and infrastructure companies.
For now, however, Romania is still leading the way. The IPO of Digi, hot on the heels of Medlife’s, shows that the efforts of the BVB, the financial markets regulator, government officials, and other stakeholders to develop the exchange are bearing fruit. Initiatives such as the 8 barriers programme targeting barriers to investment, the launch of a new trading platform, and a financial education campaign for retail investors are aimed at enticing companies to list, attracting more investors and – ultimately – achieving the goal of an upgrade from frontier to emerging market status, which would enable more foreign institutional investors to buy Romanian stocks.
While further steps are still needed, Cristina Reichmann, partner at CMS Cameron McKenna, an adviser to one major investor in the Digi IPO, points to numerous positive developments on the market in the past five years.
“Listings of major state owned companies have raised awareness of the market. Another positive factor is the development of the legal and regulatory framework. It was a very good initiative of the Bucharest stock exchange to identify a list of barriers,” Reichmann tells bne IntelliNews. “Throughout this period our working groups comprising a wide task force have focused on removing these barriers, and has brought the Romanian capital markets closer to a potential reclassification by MSCI from frontier markets to emerging markets.”
The main barrier that still remains to achieving this upgrade is liquidity. Small and medium sized IPOs such as those of Digi and Medlife will help, but passing this hurdle ultimately depends on the expected listing of state hydropower company Hidroelectrica, for which the timing is still unclear. Greg Konieczny, the manager of property restitution fund Fondul Proprietatea, a minority shareholder in Hidroelectrica, said in April that it would “take a miracle” for the IPO to go ahead this year.
In 2013 and 2014, the BVB saw its largest ever IPOs with the listings of three majority state-owned energy companies, Nuclearelectrica and Romgaz in 2013 and Electrica in 2014. Since then, however, the pipeline of state-owned enterprises coming to the market appears to have
– temporarily at least – dried up. The Hidroelectrica IPO is not now expected before 2018, and proposals from the property fund for IPOs of other companies such as salt monopoly Salrom have so far failed to win over the government.
At the same time, there is increasing confusion over the government’s longer term plans for enterprises that remain in state hands as they are likely to be rolled into a new sovereign wealth fund currently being mulled in Bucharest. The lack of information about how the fund will be managed has led to concerns about its transparency.
Looking to the private sector
More private sector listings won’t be of a size to compensate for Hidroelectrica’s delayed IPO, but they will have other benefits in terms of further diversification.
“Romania is the second largest market in the region, but it is not clear how the growth of the economy has been reflected in the growth of the capital market,” says Reichmann. “For this to be reflected, we should see diversification of products, a transparent and articulated privatisation programme, and thirdly, investment education.”
She points out that for domestic institutional investors such as pension funds, “diversification is the key word. Otherwise they will not find adequate products for the quite important pockets of money they are managing, and will instead invest into foreign products and support other economies.”
The expectations are that while a flood of private IPOs is not expected, the pipeline is now open. “We saw a huge success story with Medlife ... after Medlife I think the ice has broken because we saw several Romanian entrepreneurs opened their minds and are thinking actively of listing their companies on the Romanian stock exchange,” said Lucian Anghel, president of the BVB’s board of governors, in an interview with bne IntelliNews on the sidelines of the EBRD’s annual meeting in May.
There is also optimism from advisers, with Ionut Sas, tax partner at PwC Romania, saying the two successful IPOs gave a boost to the exchange and made the market more attractive, both to prospective companies interested in listing, and investors.
“There are good signs that other companies will follow – but this will also depend on the success of these two IPOs in the medium run,” Sas says. “Given that both IPOs were single listed on the Bucharest Stock Exchange, the trust in the market seems to be at a good level and, in order to have other success stories, the market should be more liquid, attractive from the fees perspective, as well as to further update and modernise the legal and tax legislation for such transactions.”
The new private sector companies likely to come to market are participants in the Made in Romania programme launched by the BVB with the aim of selecting the most promising candidates for a capital market debut and funding advisory services to explore their options.
Anghel declines to mention the names or even the sectors of potential IPO candidates but says they are spread across “various sectors with very good growth prospects, or where the market is not dominated by one player, it’s very fragmented. In fact the first one that will have this chance to take money from an IPO or to have access to the capital market probably will be the next leader because it could get capital to acquire, or to consolidate market share ...To be the leader or not to be the leader, that is the question.”
This was more or less the strategy employed by Medlife, which has pursued an aggressive consolidation strategy in the private healthcare market both before and after its IPO. In the last few months alone it has bought up an 80% stake in medical centre operator Almina Trading, as well as taking over private outpatient services provider Anima.
Bucharest is by no means the only stock exchange to see a revival in IPOs in the last couple of years. The Digi IPO in Romania coincided with announcements of IPOs in Croatia, Serbia and Slovenia, arousing speculation this could be the start of a larger return of the IPO markets in the region.
“There are good signs that the stock exchange market in Romania is going to be more attractive and that is considered as a viable financing or investment/ disinvestment solution,” says Sas, who argues that just as Bucharest followed the path of the Warsaw Stock Exchanges, other exchanges from the region could follow Bucharest.
In Croatia, tourism company Arena Hospitality Group, formerly Arenaturist, raised a total of HRK788mn (€100mn) in a public offering held between May 15 and May 25.
The decision to list followed the takeover of a majority stake in Arena by London-based PPHE Hotel Group in 2016. PPHE then merged all its hotels in the CEE region, including eight Park Plaza hotels and Art’otels in Germany and Hungary, under Arena, which now operates 27 hotels in the three countries with more than 10,000 rooms.
Upon the takeover, “If market conditions allowed, PPHE planned to seek to raise new equity to enable Arena to accelerate its investment plans and finance expansion outside of Croatia,” a spokesperson for Arena told bne IntelliNews. “The Croatian tourist industry has attracted investor interest and it is believed that there is demand to invest in Arena at this point in time.”
The IPO was the biggest on the Zagreb bourse post-crisis, dwarfing that of the first company to come back to the market, shipping company TankerskaPlovidba in early 2015.
Meanwhile in Slovenia, the country’s largest lender NLB outlined its IPO plans on May 15. The bank plans to proceed with an offering of at least 50% of its existing ordinary shares on the Ljubljana Stock Exchange (LJSE) by mid June. NLB also plans to list global depository receipts in London.
The IPO was expected, as the Slovenian government had committed to re-privatising NLB, which was wholly nationalised as part of the government’s bailout of several major banks in 2013. Initially the government planned to reduce its 100% stake to 25% plus one share via an IPO in 2017. However, the European Commission endorsed, on May 11, a request from the Slovenian government for a more gradual sale of the bank: a 50% stake by the end of 2017 and a further 25% by end-2018.
Commenting on the IPO plans, Lidia Glavina, president of the management board of state holding company Slovenian Sovereign Holding (SSH), described the move as a “milestone in the state asset management strategy of the Republic of Slovenia”.
However, the IPO process recently suffered a setback when the government refused to take measures requested by SSH in relation to an outstanding legal dispute over Yugoslavian era deposits. The outcome of the discussions between SSH and the government is still unclear, but it is likely to result in a delay to the IPO.
Most recently, MK Fintel Wind, a joint venture between Serbia’s MK Group and Italy's Fintel Energia Group, is reportedly considering an IPO on the Belgrade Stock Exchange to finance the construction of a new wind farm in northern Serbia.
Edward Keller, a partner in Dentons' global corporate, mergers and acquisitions and private equity practice groups, and head of the Budapest office's capital markets practice, says he is “cautiously optimistic” about the prospects for the IPO market in SEE, but adds that, “it remains to be seen whether the recent increase in activity and positive outlook is generally as a result of the positive global capital markets (which remain extremely frothy), or a fundamental market change for SEE in particular.” He also stresses that the region is “far from homogenous” and that if there are any positive trends, “I believe they are mainly for the EU member states in the region”.
Whether more companies from the region will list in the coming months or years “will depend for the most part on the general state of the global capital market, which has been fuelled by the general global oversupply in capital,” Keller says. “If the markets generally continue to be as robust as they have been in the last year, then of course we will see more IPOs from Slovenia and Romania in particular, and to a lesser extent from Croatia.”
The next big thing
Romania, with its positive deal flow and outstanding 8% dividend yield, is currently in the spotlight of international investors. Yet there are signs that the Bulgarian capital market could be poised to achieve prominence too. The potential of the market was highlighted at a recent Bulgarian capital markets investor day co-hosted by the EBRD and the Bulgarian Stock Exchange in London on May 18. Bulgaria has seen two moderately successful IPOs, both by companies in the IT sector, in the last couple of years.
The first to come to the market – almost eight years since engineering and construction company Enemona listed in the last major pre-crisis IPO – was Bulgaria’s largest IT group Sirma in 2015. The BGN11.5mn (€5.9mn) was towards the lower end of the target range, but still provided Sirma with funds to grow further, penetrate new markets and invest in research and development.
It was followed in autumn 2016 by the IPO of Allterco, a provider of mobile services, which was oversubscribed. The company’s main products are home automation system She and MyKi watch, which allows parents to communicate with and monitor the location of their child.
Despite the relatively small sums raised, Miroslav Stoyanov, investment banking director at Sofia-based Elana Trading, believes the two IPOs “could be considered highly successful as they were conducted in a very tough environment”.
“Following the world financial crisis investors’ trust is a hard thing to gain back. Sirma and Allterco were the pioneers that should serve as catalysts in that process,” says Stoyanov. Not only had Bulgaria only recently emerged from the international economic crisis, the country’s financial system had also been hit by the collapse of its fourth largest bank, Corporate Commercial Bank (Corpbank) in 2014. Deposit guarantee payments had the benefit of raising the amount of cash available in the market at the time of Sirma’s IPO, but at the same time it had a damaging effect on confidence.
Ivan Takev, CEO of the Bulgarian Stock Exchange, acknowledges that “we have gone through turbulent times recently – both in Bulgaria and internationally”. However, he believes that, “these are now over and much more investment and more listings will follow”. Companies from Bulgaria’s growing IT sector in particular are believed to be considering a debut on the stock exchange, while there are hopes that regulatory obstacles previously blocking the IPOs of major companies from the energy sector will be lifted.