Kathryn Wells finds out from the government’s advisers.
 |
“The first that we knew of who had won was when the Erste Bank representative turned and made the victory sign. The deputy chairman of the commission then destroyed the computer’s hard drive live on TV!”
Maxim Seltzer |
THE TV IMAGES were striking. On Tuesday, December 20 2005, images of a beaming Nikolae Cinteza, wielding a hammer, were broadcast to homes across Romania. Cinteza, deputy chairman of the BCR privatisation commission, was using the hammer to destroy the hard drive of the computer into which the two remaining bidders for a majority stake in the country’s largest bank, Banca Comerciala Romana – Austria’s Erste Bank and Portugal’s Millennium BCP – had secretly entered their improved bids.
The decision to destroy the hard drive live in front of the gathered media was part of a push to underline the transparency of the entire bidding process – this way only the bid of the winning bank, in this case Erste, would ever be known in public.
Erste had come through a novel two-round bidding process to acquire a majority interest in BCR for €3.75 billion. This comprised a 36.8825% stake from the Romanian government, a 12.5% plus one share stake from the European Bank for Reconstruction and Development, and a 12.5% plus one share stake from the International Finance Corporation. Using the June 2005 book value reported by BCR of €1.037 billion, this translates to a price/book value multiple of 5.84.
This second-round bid-off was the end result of 11 banks having registered their interest in the stake in July 2005. Of these, nine – BNP Paribas, Banca Intesa, Deutsche Bank, Dexia, Erste, Fortis, KBC, National Bank of Greece and Millennium BCP – completed full due diligence. Seven binding bids were submitted after 12 weeks’ due diligence.
Coming full circle
The privatization of BCR had long been seen by the Romanian government and the international community as a critical event in the development of the country’s economy.
The decision to privatize had begun much earlier, in the late 1990s. At that time, several banks, including Merrill Lynch, JPMorgan, Daiwa and CAIB, took part in a tender for the mandate to arrange the sale, with Merrill Lynch emerging as the winner. A feasibility study, partly funded by the EU’s Phare programme, was carried out.
However, after a disagreement, Merrill did not renew its contract in 2002. A new tender was carried out, with Daiwa pipping JPMorgan to the role in June 2002 with a lower bid.
The government, together with original adviser Merrill Lynch, had decided on a three-stage strategy for privatizing the bank that would first involve it selling a stake in BCR to a strategic investor, second sell a stake to the bank’s employees and, finally, sell a stake to the EBRD and IFC. Despite the change in adviser, the government wanted to pursue the same strategy. This, though, was to prove tricky.
“We started execution of the government’s strategy but it became clear that the financial position of many European banks was not as good as we would have liked,” says Maxim Seltzer, executive director of investment banking at Daiwa SMBC Securities in London, who led the team advising the Romanian government. “In 2002, the European banking stock index was down considerably. Some banks, such as HVB, were having to write off over a billion euros in extra provisions.”
But despite what was hardly an ideal time to encourage European banks to invest in BCR, the government, under pressure from the IMF and World Bank, decided to press ahead with a tender.
Four banks initially put in bids for the stake, but none made it past the first hurdle.
Although this aptly summed up the difficult market conditions, the government was not prepared to give in immediately. Having been forced to reject all bids on legal grounds, it suggested explaining to bidders what had happened and seeing whether they wished to resubmit their bids.
This second attempt took place in November. However, ever-worsening conditions meant that no banks submitted expressions of interest. The tender was cancelled.
Different tactics were clearly required to kickstart the process. Daiwa, as adviser, eventually came up with the idea of turning the government’s original schedule of sales on its head. “We suggested to the government that rather than stopping the privatization altogether, they should reverse the order of the stake sales, to give the process continuity,” says Seltzer. “In other words, to conduct the EBRD/IFC sale first, then the employees’ sale, and only finally the sale to a strategic investor. This would allow the EBRD/IFC sale to work as a catalyst for the remainder of the process.”
By early 2003 this change in approach had been agreed on by the government, World Bank, IMF and other interested parties. A new law, allowing the sale of a stake to the EBRD and the IFC before a strategic sale, was passed on April 1.
The EBRD and IFC were asked in early 2003 to express their interest in BCR, and with the path now clear for an agreement to be struck, the two institutions began due diligence in the spring of that year. By September, they had agreed to become investors and made their offers. It was to be the IFC’s first equity investment in emerging Europe, marking a new focus on the region for the institution.
Conditional purchase
The transaction was to involve the institutions each buying a 12.5% stake plus one share for $111 million each. They did, though, attach some conditions.
“Key to the agreement was that the two institutions wanted to take a larger stake than had originally been proposed – 25% rather than 10%,” explains Seltzer. “They also required that BCR be privatized by the end of 2006 through a sale to a strategic investor. Each institution required a seat on the board, and they jointly established an institutional building plan as well as a set of financial targets that BCR had to reach.”