Strong IPO is no insurance policy on PZU's long-term success

By bne IntelliNews May 6, 2010

Jaroslaw Adamowski in Warsaw -

The IPO of Poland's largest insurer PZU attracted an unprecedented wave of interest from both individual and institutional investors, yet further proof of how Poland is managing to withstand the market jitters over Greece and the future of the euro. Whether PZU can meet investors' expectations over the longer run remains to be seen.

The offering of a 29.9 % stake in PZU is set to be the biggest stock market debut in Central and Eastern Europe this year when the shares start trading on May 12 after over 250,000 Poles rushed to bid for over 7m shares. The placement was priced on April 30 at the top of the range at PLN312.50 (€80.1) per share, raising PLN8.1bn (almost €2bn). In total, individual investors alone bid for €580m worth of shares, while Polish and foreign institutional investors bid for shares worth €1.47bn. Foreign funds accounted for 41% of the total, but their appetite was far from appeased. According to Poland's Ministry of Treasury, the stock reserved for institutional investors was oversubscribed by nearly 900%. "This remarkable outcome proves that foreign investors are briskly interested in PZU, and it also highlights Warsaw's potential as Central-Eastern Europe's financial hub," Poland's Minister of Treasury Aleksander Grad said in a statement.

Defying the general gloom around Europe's stock markets, the shares are expected to climb between 10% and 25% on their trading debut, predicts Adam Korecki from the Warsaw-based brokerage TMS Brokers. Even so, while demand for PZU's shares was additionally boosted by the expectations of rapid gains in the share price, some experts are sounding a note of caution about the giant insurer's rather wobbly position on Poland's increasingly competitive insurance market.

Choppy waters

The interest sparked by the company's debut wasn't undermined by PZU's recently posted results that showed a significant 31% drop in first-quarter profit from last year, down from PLN1.17bn to PLN807m. Moreover, experts point out that latest weak results could be the tip of an iceberg for the insurer. "Although the PZU Group remains Poland's prime insurer, it continues to lose business to more innovative competitors, mostly local branches of Western insurance firms," Piotr Kuczynski, chief analyst for Xelion Financial Advisors, says. "The insurance market's saturation level is still way behind western standards in Poland, which is good news for PZU. On the other hand, the life insurances segment, which has traditionally been the firm's strong point, continues to shrink."

Also a deal to end a battle between PZU's two main shareholders arguably leaves the insurer weaker than it might appear.

PZU's stock market debut was made possible by an agreement reached between the Treasury ministry, until recently holding a 55% stake, and the Dutch insurer Eureko to end a dispute over control that has dragged on for over a decade.

Since Eureko purchased a 33% stake in the PZU back in 1999, the government has proved reluctant to hand over a further 21% stake in PZU to Eureko, as was originally agreed. The Dutch firm had applied to the International Arbitration Court in London, seeking a whopping compensation of almost €10bn from Poland, but finally cut a deal with the Treasury last October. Kappa, the joint venture of Poland's Treasury and Eureko, sold a 14.9% stake in PZU, 10% of which was ceded by the state. The profit will be used to recompense the Dutch firm. In addition to selling Kappa's stake in the insurer, Eureko put a further 10% on the market, while the treasury threw in another 5%. The state would remain a minor stakeholder with 45% of PZU, while Eureko would keep the remaining 13% of the shares.

Finally, in the frame of the Treasury's agreement with Eureko, a PLN12.75bn dividend was paid out by PZU in late 2009, 95% of which was issued from the company's reserves accumulated up to that moment. Eureko, for its part, was generously awarded PLN7.5bn of that. However, equally this has emptied PZU's pockets and could sabotage the regional acquisitions that firm envisaged in its IPO prospectus. Besides developing the activities of its subsidiaries in neighbouring Lithuania and Ukraine, Polish media report that PZU is interested in purchasing a stake in Bielgosstrach, Belarus' largest insurer. "Expansion to Eastern and Southern Europe could be an apt insurance policy for PZU," says Xelion's Kuczynski. "However, everything depends on the stance taken by the Ministry of Treasury, its biggest stockholder. In order to let PZU prosper, the government must keep away from the company's cashbox."

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