Sunday, 29 May 2011

Privatisation flop

It seems that privatisation lucky streak of PO-led government has come to an end or has just been suspended for a while. A bit of a pity, given that from 2006 to early 2009 privatisation proceedings resembled an obstacle course. Privatisation through stock exchange was brought to a halt in 2006 when PiS-led government took over and wasted several chances to sell stakes in state-owned firms above their intrinsic value (rampant bull market allowed for it). Then came the bear market of 2007-2009, when it was hard to sell anything to private investors and when market made it hard for private investors to make profits on IPOs.

The tide has turned in 2009, with the comeback of upbeat market sentiment. In the first half of 2009 the government finalised the privatisation of Coal Mine Bogdanka, one of the best-run and most profitable coal mines in Poland. IPO price was considerably low, as the bull market starting in February 2009 was still in teething phase and market participants were still wary of relapse of bear market. The government sold shares in Bogdanka for 48.00 PLN per share, while the open price on flotation day was 56.10 PLN - investors who had subscribed for the stocks could reap a profit of 17% right away or wait until October 2010 for a tender offer, under which a Czech company wanted to buy up shares of Bogdanka at the price over two times higher than IPO one. Those who earned the most on the transactions are future pensioners, as key buyers were Polish pension funds. This means that the Company is still state-owned as assets in pension funds are not owned by members of pension funds, but by the state. In the meantime the state sold (to itself, with intermediation of expensive financial instututions) another stake in Bogdanka, on 9 March 2010, for 70.50 PLN per share.

2010 saw three spectalular privatisations.

PZU was floated on Warsaw Stock Exchange on 12 May 2010. The IPO price was 312.50 PLN per share, when the market opened, stocks were traded for 349 PLN, the same day market closed at around 360 PLN. Investors, including me, enjoyed returns of 12 - 16%. This was the first privatisation run as part of 'civic shareholding' (akcjonariat obywatelski) programme. Number of stocks for which a single investor could subscribe was capped at 30 (what gave an equivalent of circa 10,000 PLN) and stocks were sold with modest discount, to let ordinary people earn. PZU IPO, mostly after years of squabbling with Eureko was perceived as a great success. Currently PZU stocks cost around 390 PLN

Tauron Polska Energia stocks were first traded on 30 June 2010. This time there was a dent on the government's offer. The initial issue price of 6.30 PLN was too high for institutional investors and the stocks were eventually sold for 5.13 PLN. The flotation day was, coincidentally, the day when the biggest market correction in 2010 hit its trough and open price was no higher and no lower than 5.13 PLN. Profits weren't reaped, but according to analysts' valuations the Company was much undervalued. I also bought these shares in IPO and first quotations were a big let-down for me. My exit strategy was to buy up some more stocks, if the price went down and I followed out my plan. A few months later Tauron stock began to increase in price and within six months fetched a return of 35%. Patience was rewarded. In 2011 the price dropped, I began selling and buying back stocks with a view to earn more. Currently Tauron stocks are traded for around 6.60 PLN, not much below their ever-time high of 6.92 PLN from 17 December 2010 when they were becoming a component of WIG20.

Warsaw Stock Exchange went public in November 2010. IPO price was 43.00 PLN and was deemed to be overvalued. Despite this, demand on WSE shares was record-high and with open price on 9 November 2010 at 50.75 profits for a private investor reached 18%. Not bad. I didn't subscribe, as I thought the price was too high and I was wrong. Since then WSE stock price hit its low of around 44 PLN and high of 54 PLN and still seems to me overvalued. But after all this means the government has made a good deal on behalf of taxpayers. Currenly you can buy one share of WSE for around 52 PLN.

Over 2010 the PO-led government has established an excellent track record in terms of privatisation through stock exchange. But one success following another increases risk of complacency and hubris. Perils wait just round the corner and treasury minister Aleksander Grad had to learn a hard lesson this year.

One of two big IPO planned for 2011 were Bank BGŻ and Jastrzębska Spółka Węglowa. The former has already been floated, the latter is due to become public in July.

First step of Bank BGŻ hapless IPO was its issue price of 90 PLN, with P/E at 34x. Such high price-earnings ratio implied the bank was much overvalued. Demand from private investors was not as high as in any of three big offers in 2010, but was high enough to cover the whole tranche of stocks earmarked for them. Investment and pension funds categorically refused to buy BGŻ stocks at such sky-high price and as a result the issue price had to be brought down to 60 PLN, much closer to the intrinsic value of these shares. The state had planned to raise 1.44 billion PLN from sale of 37% stake in BGŻ, but eventually it had to make do with 344 million PLN from sale of 12% of shares. Minister Grad now waits until the bank's value gets higher (this may take some time) and thinks hard how to bend over backwards to meet privatisation proceeds targets for 2011. In the meantime it was revealed that some time ago Rabobank, the majority shareholder of BGŻ offered the state 74 PLN for one share of BGŻ - 14 PLN per share more than the market wanted to pay, plus savings on IPO costs. The Polish adage saying that "an avaricious man loses twice" proved right. Shares of BGŻ were floated last Friday. Individual investors could subscribe for 120 shares for 90 PLN each, and eventually were assigned 20 shares per 60 PLN each. With opening price of 62.50 PLN one could earn 50 PLN minus transaction costs and capital gains tax. Lovely... I still hold 20 shares, my strategy on what to do with those security is rather unclear, but today as I was passing by a BGŻ branch I felt like an owner.

Despite this I'm looking forward to next IPO of Jatrzębska Spółka Węglowa, which may be hampered by demands of brazen trade unionists (read spongers) from the Company. May those deals be brought off wisely - I make this wish both as a taxpayer and as an investor, or to make no bones, a speculator.

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