Romgaz IPO raises bar for Romanian listings

Privatization programme back on track; stock exchange chief targets EM status.

Romania’s previously troubled privatization process took on a new lease of life in November with the sale by the government of a 15% stake in natural gas producer Romgaz.

The L1.7 billion ($535 million) IPO – the largest ever from the southeastern European country, and the first to include a listing in London as well as Bucharest – was oversubscribed and priced near the top of its marketed range.

Coming hard on the heels of a smaller listing of fellow state-owned energy firm Nuclearelectrica, whose L282 million IPO in September was the first from Romania since 2007, the Romgaz deal has revived hopes for acceleration of the privatization programme and the development of local capital markets.

The sale of a portfolio of government assets was a condition of a €20 billion bailout of Romania by the IMF, World Bank and EU in 2009. But the process has been dogged by delays.

Dented confidence

The cancellation of a partial privatization in July 2011 via a $700 million secondary offering of oil firm OMV Petrom dented investor confidence. Afterwards, deals were slow to emerge. Mandates on Romgaz were first awarded in January 2012 to Goldman Sachs and Erste Group.

The completion of the Romgaz privatization, albeit after almost two years, heralds an improvement in Romania’s institutional capacity in privatization, says Greg Konieczny, fund manager at Fondul Proprietatea, Romania’s holding fund with minority stakes in state firms, which retained its 15% holding in Romgaz (the government set up Fondul Proprietatea to compensate citizens who lost property under communism).

“Romgaz was a very good education process for the government,” he says. “They now have a better understanding of the requirements of international investors, in terms of both company structure and price, and future IPOs should be much easier to execute.”

That prediction will be tested in the first half of next year when two more state-owned energy firms, Hidroelectrica and Electrica, are due to make their stock market debuts. Konieczny says policymakers will likely look to replicate the dual-listing structure that helped ensure 40% international participation in the Romgaz IPO.

At the Bucharest Stock Exchange (BVB), however, new chief Ludwik Sobolewski – the former head of the Warsaw bourse – wants to keep listings local and encourage holders of Romgaz’s roughly $200 million-worth of global depositary receipts to migrate to Romania. “It is in the interests of all parties, including the investors, to have a single pool of liquidity,” he says.

External investors complain of barriers to entry into Romania’s domestic equity market, including lengthy account-opening procedures and registration, lack of clarity around taxation and onerous conditions for executing voting rights.

Regulatory reforms are in hand, however, as well as upgrades to the BVB’s own operations, such as improving market-making procedures and separating clearing and settlement from the trading functions. Sobolewski is confident that these will have been completed by the time of the next privatizations.

In the meantime, he points to “fairly spectacular” levels of domestic demand for Romgaz’s offering as proof of rising liquidity in the Romanian market. Institutional and retail local investors took around $200 million of the deal. Less than two weeks later, the market absorbed a secondary sale on BVB of more than $100 million of OMV Petrom stock.

Ingo Bleier, head of investment banking at Austria’s Erste, notes that a strong local market is crucial to attracting external investment. “Foreign buyers want to be reassured that if they need to exit the market there will be a domestic bid to take them out of their positions,” he says.

Critical mass

Claudiu Cercel, deputy CEO of BRD, Romania’s second-largest bank, predicts that the country’s domestic institutional market could grow from €13 billion today to as much as €50 billion by the end of the decade. “The development of the sector is gathering pace, and we are approaching critical mass,” he says.

Both increased liquidity and reforms will be necessary for Romania to achieve emerging market status in global equity indices, however. Now classed as frontier, Romania has benefited from inflows into that asset class this year – but further capital markets’ expansion will require a step-up in status, says Cercel. “We are on some radar screens, but we would like to be on a lot more radar screens.”

Sobolewski agrees. “Being frontier offers opportunities at the moment, but being an emerging market would greatly increase the flow of capital into Romania,” he says. In what Sobolewski says is “an optimal scenario”, the country would graduate to emerging market status by the end of 2015.