Poland seeks to tap renewed investor demand as it pushes Energa IPO

By bne IntelliNews November 5, 2013

bne -

On the back of the hugely successful recent listing of PKP Cargo, the Polish government on November 4 said it will carry out the long-planned IPO of utility Energa this year. However, analysts say it will need to price the offer carefully.

Poland's fourth largest power utility announced it will float a 34.18% stake that's held by the Ministry of Treasury at some point in the fourth quarter, "depending on market conditions". The offer will be targeted at domestic retail investors and institutional investors, both at home and overseas.

Warsaw hopes to raise as much as $700m (PLN2.2bn) from the IPO, according to Bloomberg, which claims to have seen the sale terms. That would make it the biggest IPO in Central Europe since Polish coal producer JSW raised PLN5.4bn (€1.3bn) in a share sale in 2011. Treasury officials said in October that the proceeds would help finance the budget gap and curb growth in debt.

The sale of Energa has been on the cards for some time. An attempt in 2010 to sell 84% of the company via a "proto-privatisation" to Poland's largest utility, state-controlled PGE, for PLN7.5bn broke down due to opposition from the country's anti-monopoly office.

An IPO of Energa was included in the 2013 privatisation programme, but the treasury has been struggling to get it out of the door amid uncertainty over the US Federal Reserve's stance around its quantitative easing programme, as well as depressed power prices across Central Europe. That has put the government's PLN5bn target for privatisation revenue at risk.

However, with the Fed having pulled back from suggestions that it will start to taper its asset purchases this year, and recovery of European economies making steady progress in the last few months, the window of opportunity for equity issuers has reopened. Russia has seen several IPOs in recent weeks, while Romania successfully sold stakes in NuclearElectrica and Romgaz.

Short window

Yet the Fed will act sooner or later - early 2014 is the current bet - meaning the window of opportunity is likely to be short. The acceleration in the plan for Energa has undoubtedly also been pushed by the huge success seen by national rail operator PKP in the recent IPO of its freight division. In the largest listing in Warsaw year to date at PLN1.42bn, PKP Cargo shares jumped 18% on October 30 as they made their debut on the Warsaw Stock Exchange, which was always likely to spur other share sales.

However, analysts warn that the treasury shouldn't get too carried away. With power prices across Europe in the doldrums, and a plethora of state-controlled utilities having debuted on the WSE over the past five years - many trading below their IPO prices - they warn that pricing is key for the Energa offer.

There are additional challenges. Poland's confused energy strategy over the past year or so is a concern. State-controlled companies are complaining of the huge pressure they face from investment demands from the government, which warns of an urgent need for new generating capacity.

PGE recently backed out of a PLN11.6bn project to build two new units at the coal-fired Opole power station, insisting the plan makes no economic sense. It was promptly pushed back in, alongside a raft of state-controlled construction and coal companies. Such companies from across the spectrum are also being put in harness to drive Poland's development of its shale gas reserves and build the country's first nuclear power station.

Energa's heavy presence in renewables - over 36% of its portfolio is in water, onshore wind and biomass, according to PAP - creates another worry. Investors in green energy in Poland have been arguing with Warsaw over a new subsidies programme for over a year, with the government proposing a drastic cut in support, particularly for onshore wind and co-firing (coal and biomass).

On the plus side, investors have benefitted recently from the government's demands for high dividend payouts in a bid to shore up state finances. Energa's results appear to be recovering, with the company reporting net profit rose 15% year on year in the first nine months of 2013. Net profit fell 31% last year.

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