Gyurcsany sticks to his guns
THE BID BY Austrian energy company OMV for its Hungarian counterpart, Mol, has become one of the most exciting and intriguing M&A stories in Europe. A great deal is at stake, not least the survival of the Budapest Stock Exchange as an effective market.
The potential transaction has generated plenty of debate in Hungary and beyond and has prompted politicians in Budapest to draw up a law to make any hostile takeover of its national energy champion as difficult as possible. Ferenc Gyurcsany, Hungary’s prime minister, is particularly concerned that Mol could end up in the hands of a state-owned rival. The new law, in turn, has led some EU officials to voice their own concerns – that Hungary might be using overly protective measures to defend Mol that undermine the free market.
So much more is at stake than a company valued at some $20 billion. The deal has important implications for the Hungarian capital markets. If successful it will undermine a local stock exchange that is already handicapped by a paucity of blue-chip companies. OMV’s advance in the summer on Mol, the biggest company on the Budapest Stock Exchange, was a rude awakening for Hungary. As a result of rapid privatization in the 1990s, many companies fell into the hands of foreign rivals. Consequently, only a few blue chips are listed in Budapest: OTP, the country’s biggest bank; Richter Gedeon, soon to be the region’s biggest pharmaceuticals company; Mol; and Magyar Telecom, which is already 59% owned by Deutsche Telecom.
BSE suffers from a lack of depth too. Forty-one companies are listed on the exchange, compared with about 100 in Vienna and more than 300 in Warsaw.
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"So many of Hungary’s assets have been privatized, the country is keen to keep a few national champions"
François Regnier, BNP Paribas Hungary |
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"There are not that many truly large Hungarian companies," says François Regnier, general manager at BNP Paribas Hungary. "Historically, they had state shareholdings but that element of their capital structure has gone down."
This is certainly the case for the Budapest exchange’s few large listings. Golden shares that gave the government special voting rights in OTP, Mol, and Magyar Telecom were abolished in April thanks to pressure from the EU. The protective exchangeable bond structure that the government’s privatization vehicle issued in 2004 in lieu of its final 25.04% stake in Richter Gedeon will also mature in 2009, after which the firm will probably be cut loose from state protection.
Hungary’s poorly performing economy, a hangover from years of open-handed governmental budgets, is not fertile ground for new listings. Foreign direct investment, a traditional strength, rarely requires additional capital to be raised locally, and even that began to fall in 2007. Not only have IPOs on the Hungarian stock market been sparse, there have also been significant de-listings in recent years. "Overall, there have been more companies leaving than joining, which is not a good trend for the Budapest Stock Exchange," says Regnier.
The extent of the danger to the Hungarian capital markets is clear. "A stock exchange needs companies to be traded. If you took out Mol and OTP, there wouldn’t be much left," says György Jaksity, managing director at Concorde Securities, one of Hungary’s biggest investment firms. The departure of the two biggest companies from the Budapest Stock Exchange would indeed drain liquidity to such an extent that doubts would be raised about the market’s role. Mol alone accounts for slightly more than one-third of the market’s total capitalization. OTP’s share is slightly less than one-third. Magyar Telecom has 12%. Richter Gedeon has 9% but the next biggest company is a third the size.
Few new listings
In both 2006 and 2007, there were only three new listings on the Budapest Stock Exchange. In both 2004 and 2005, there was just one. These figures are comparable to the activity on the Vienna and Prague exchanges this year, with seven and two IPOs respectively. The Warsaw market, by contrast, has seen 70 IPOs.
Still, officials at the BSE are putting a brave face on events. "It was a big year for us," says Attila Szalay-Berzeviczy, chairman of the Budapest Stock Exchange. Indeed, the exchange gained its first foreign company listings in 2007. These were AAA Auto, a Czech used car dealer that started operating in Hungary in 2006, and French property developer Orco, which is also listed in Paris, Prague and Warsaw. Orco is now the fifth-biggest company on the exchange by market capitalization ($1.4 billion).
More of a concern, says Szalay-Berzeviczy, is the number of companies delisting: four in 2007, and six in 2006. Of these, private equity group Permira’s buyout of Borsodchem, the country’s biggest petrochemicals company and one of the exchange’s flagships, was particularly painful.
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"A developed capital market increases the choices of foreign investors and the deeper it is, the less premium they demand"
János Samu, Concorde |
One of the reasons why the exchange is struggling to grow is because its top companies are so attractive. Mol, OTP, and Richter Gedeon have all pursued successful regional expansion strategies in recent years in fast-growing countries. Yet with foreign institutional investors, which dominate Hungary’s capital markets, becoming more risk averse, the share prices of the blue chips have taken a hit in recent months. With the exception of Mol, the four biggest companies were all down on their January 1 2007 prices as Euromoney went to press. Still, at least they have not seen a major contraction in earnings in 2007, despite Hungary’s deficit-busting austerity measures, which have included higher taxes, fewer subsidies and lower domestic demand.
"So many of Hungary’s assets have been privatized, the country is keen to keep a few national champions," says BNP Paribas’ Regnier. It is certainly easy to empathize with the extent to which Hungarians are keen to maintain the status of their markets. "I was chairman of the Budapest Stock Exchange from 1998 to 2002, and it is close to my heart. I would be very sad if the local capital market was to shrink," says Andras Simor, governor of Hungary’s central bank. "It would not be good for the economy. But maybe then Hungarian companies that want to list would be able to find their way into foreign capital markets."