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Selling a bank in eastern Europe has so far been a pretty mundane affair. First clean up the bank's bad debts, then sell it to a foreign investor for an inflated price. In the past, this has worked well, especially with western banks practically falling over themselves to get a foothold in the region. But now the Czechs have come up with a novel way to sell their second largest banking group, Ceska Sporitelna. The Czech government has asked potential suitors of the bank to submit two bids each, one with the bank as it is, bad debts and all, the second with the debts cleaned up.
The purpose, says the Czech ministry of finance, is to ascertain which investors are serious about buying the bank and which are just trying to fish out information on what their rivals will be buying. Others see it differently. "The government does not know what to do," says Jiri Stanik, banking analyst with Raiffeisen Capital & Investment in Prague. "It has to do some price analysis by calculating the costs of cleaning and the potential benefits in terms of increasing the price against selling it as it is." This means it has to balance whether the estimated Kr50 billion ($1.4 billion) in non-performing loans is worth bailing out before a sale. Some analysts estimate a sale price of around 2.3 times book value or more but only if at least some of these loans are liquidated in some way. This would earn the government coffers up to $850 million, more than enough, incidentally, to help it bail out Komercni Bank before it is sold next summer.
The trouble with cleaning up Sporitelna's loan portfolio is that it would have to be done with tax-payers' money. Prague could conceivably transfer the debts to Konsolidacni Bank, a state owned debt-collection bank. But by doing this it would also land itself with many millions of dollars-worth of bad loans which the government has little experience of working out. "One of the ideas behind selling the bank with debts included is that the government would not have to deal with this work-out process," comments analyst Simon Nellis of CAIB Securities in Prague. "It would save the government the trouble of trying to work out those bad loans and give them to a new investor which might have some experience in this."
Paul Jennings of Thomson BankWatch, says: "The Czechs have to wrap this up quickly. The government needs another big privatization deal to help its European credentials because there is a lot of negative sentiment in the EU about the lack of reform in the Czech Republic."
The government's task with Sporitelna is a tricky one. It must sell it within the constraints of the state budget and run a fair race for the potential bidders, while trying to maximize revenue and appease opponents. Asking for two bids from each investor looks a good way of neutralizing these pressures. "But," concludes Jennings, "it's certainly an unconventional way of doing it." Peter Bennett