What happened on July 15?
Foreign investors have been getting excited about Polish stocks this year. Not only is GDP growth in Poland (7% in the first quarter of this year) the best in central and eastern Europe, but the stock market has developed into one of the region's most liquid, with a large retail as well as institutional investor base. Poland also managed to stave off a Czech- or Thai-style attack on its currency from foreign speculators this summer.
But the main reason for foreign investors' excitement was two big privatizations that came to the market within three weeks of each other this summer. First was the IPO of Bank Handlowy w Warsawy, followed three weeks later by KGHM, the seventh-largest copper-producing mine in the world.
Too much for the market?
Together they represented an increase of $1 billion in the stock exchange's market capitalization. By comparison, $3 billion had been added in the first six months of the year, mostly through the listing of national investment funds (which hold stakes in smaller state-owned enterprises now being privatized). There had been few problems with such a gradual increase, but some were concerned that $1 billion from two issues within three weeks would be too much for the market. It helped enormously that it was the country's highest-profile bank - Handlowy used to be the sole executor of foreign trade before 1989 - and KGHM, one of Poland's main hard-currency earners, which were coming to market, but it was no clear-cut case. "There was some concern that the market didn't need yet another bank stock," says one banker in Warsaw. "And KGHM doesn't offer good value relative to other mines around the world."
No doubt one thing which secured success for both issues was their rarity value, both in Poland and in emerging Europe as a whole. "Deals such as Bank Handlowy are so few and far between that they are quickly snapped up," says Jean Facon, co-head of investment banking-emerging markets at JP Morgan's London office. "The market adopts a kind of must-have approach." This was certainly the case for Bank Handlowy. The international tranche, offered as GDRs, was 17 times oversubscribed, while KGHM's issue had four times as many applications as shares on offer.
In May, though, there had been some discussions between the two groups of lead-managers to make sure that the two issues did not come too close to one another. "We did get into a lot of work behind the scenes to make sure that we didn't flood the market," says David Dwek, vice-president and project leader for UBS, which with BZW was the global coordinator for the KGHM deal, and which was also involved in the syndicate for the international tranche of Handlowy's IPO. "We agreed that the Handlowy deal would come forward a week and that ours would go back a week."
Until this point it was not even clear which of the two would come first. The KGHM privatization had started in September 1996, before Handlowy's, but was more complex to prepare. As the largest bank in Poland and the former foreign-trade bank, Handlowy had a head start. KGHM had to start from scratch. "Everything had to be done to the finest detail," says Dwek. "KGHM was quite an insular company when we started. We had to get accounts drawn up to international standards, sort out the environmental concerns, and everything was conducted in Polish."
Whether it would have mattered which of the two deals came first is a moot point. According to Harry Hampson, co-head of European equity capital markets at JP Morgan which was joint lead manager on the Handlowy IPO, it made more sense for a bank to come first: "Investing in Bank Handlowy is to take a position on the Polish economy as well as the bank, so the Polish story had to have a large profile in the presentations we gave for the international offering. KGHM, on the other hand, is a mining company which will by necessity be compared with other mining operations around the world, and is dependent on fluctuating commodity prices."
This did deter certain groups of international investors from buying KGHM. Costs at the company are much higher than at comparable mines in Latin America or South Africa. The management has embarked on an ambitious restructuring programme to reduce costs, which includes cutting the workforce to 18,000 by 2000 (9,000 fewer than in 1996) and spinning off small non-core interests including a cellular phone company and a mutual insurance company. But three years was too long for some to wait. "We knew that some specialist mining investors could and did go elsewhere to get exposure to copper, but they weren't completely negative about the deal," says Charles Kirwan-Taylor, co-head of equity capital markets at BZW. "If they had been we couldn't have got the emerging market investors on board - and they were our biggest single group of investors."
And Kirwan-Taylor is keen to point out that KGHM was marketed as a Polish story: "We stressed that the macroeconomic fundamentals were the strongest in central Europe, and that the stock market was developing well thanks to the listing of national investment funds and other companies this year." KGHM also had a rarity value which Handlowy did not. "We were always confident that a mining company in Poland would be of interest to international investors who wanted to diversify their portfolios," he says. "It was the first chance they'd had to invest in a medium-sized non-financial company."
But KGHM did benefit from the wave of enthusiasm about shares which Handlowy created. Priced at the top of the range at Z35 ($10.80 for GDRs), the Handlowy share price increased rapidly to Z42. "The price rise in the first week was a consequence of the huge interest in the issue," says Hampson. "This put pressure on retail investors to sell and take their profits, putting the price down to Z39, but it's now back to Z42 to Z43."