Local brokers hold their own
WHEN THE PORTUGUESE state sold off most of its 30% stake in oil and gas company Galp Energia in October last year, 200,000 retail investors, about 3% of the adult population, subscribed, contributing more than 40% of the €1.1 billion raised in the IPO.
That deal brought retail investors back to the market in big numbers for the first time since 2000 but institutional investors had already been paying attention for some time. The takeover battles for Portugal Telecom, one of the country’s largest companies, and BPI, one of its largest banks, had already attracted an influx of money from a variety of players new to Portugal, such as hedge funds and a new crop of private Portuguese activist investors. The hyperactive trading around these events and the fevered bid speculation, which spilled over to other corners of the market, helped drive average daily trading volumes on Euronext Lisbon in 2006 up 35% on 2005 levels to 51.1 million shares a day. It also helped push the main Portuguese index, the PSI 20, up by more than 30%, making it one of the best performers in the eurozone, despite the fairly disappointing performance of the economy.
"Bid speculation has been a major driver of the index," says Pedro Pintassilgo, head of Portuguese equities at F&C Investments in Lisbon. "Big investment houses have started to look at the Portuguese market with new eyes. There is a lot of liquidity about and a recognition that Portuguese companies are still cheap and also obvious targets for other European, particularly Spanish companies."
With the PSI 20 up another 27% so far this year and volumes up another 30%, the conditions are right for many more deals to get done. The problem is that many of the biggest potential deals, expected to come from the government’s privatization programme, which aims to raise €950 million this year, look likely not to make it to the stock exchange.
"The government has always given preference to the public markets," says Luis Vasconcelos, member of the executive committee at Lisbon-based investment bank Finantia. "When the government decided to reprivatize things after the revolution, it passed a law that stated that the government should give preference to stock market listings because it also wanted to develop the country’s capital markets. Most of the government’s assets have gone this way, but with the few things left that it has to sell the story is more complicated."
The privatization of ANA Aeroportos de Portugal is bound up with unpopular plans to tender construction of a new airport 50km outside Lisbon. The proposed new airport is unpopular with Lisboetas, who are attached to the convenience of having their existing airport just a 15-minute taxi ride from the city. The desire to privatize and simultaneously build a new airport means that the sale of a stake to a strategic partner is a more likely solution than a stock exchange listing.
Bankers also doubt that plans to privatize TAP, the national airline, will involve the public market because the health of the company, like many other small flag carriers, is less than glowing. The sale of a stake to a strategic partner is again thought to be a more likely outcome.
In the case of EDP, the government is also thought to be in no rush to further reduce its stake because of the rapidly evolving consolidation of the power sector across the Iberian peninsula, making it an awkward time to sell down. The fear is that EDP would be an attractive target for one of the larger European groups, so the government would feel more comfortable about reducing its stake once a stable shareholder base emerges.
Portuguese solutions
The government is rightly concerned about the future of EDP because the domestic market has not yet been opened to competition. A market regulator is being created to encourage and oversee competition but until that is all in place it would be foolish to allow a foreign company to own such a strategic monopoly.
Portugal has pursued one of the most comprehensive privatization programmes in Europe. In the 1990s it sold off the vast majority of its corporate holdings in the energy, telecommunications, financial services and other sectors, raising about €20 billion. The government’s commitment to the programme is at root ideological. Increasingly, though, it is being driven by the country’s fiscal deficit, which breaches the 3% limit set by the Maastricht criteria.
"All options are open to the government but while it does of course care about valuations it has also expressed the view that the industrial project of these companies is a major concern," says Luis Luna Vaz, head of equity capital markets at Espírito Santo de Investimento. "This government, like the previous one, has no ideological problems about selling to the market or to a strategic bidder but it’s not just a question of who will write the biggest cheque."
Private equity houses and some bankers claim that there is a worrying increase in the government’s proclivity to find "Portuguese solutions".
Buyout groups were angered by last year’s privatization of pulp and paper company Portucel, and Galp Energia, Portugal’s largest oil company, believing that they lost out because the government and regulators favoured Portuguese investors.
"Just look at the case of Galp," says an angry investment banker at a bulge-bracket firm in Madrid. "When ENI bought its one-third stake years ago it was granted an option to take control of the company and Galp was destined to end up as a subsidiary of ENI. Today ENI still has its one-third stake but in the recent privatization one of the wealthiest individuals in the country gained an equal stake and there’s no way ENI is going to take control now. This sort of thing just doesn’t happen without the support of governments."