THE BULGARIAN GOVERNMENT’S move last month to take control of the Bulgarian Stock Exchange provoked outrage among many of the BSE’s existing shareholders. Opponents called the move a forced nationalization, while the government says it is the prelude to seeking a strategic foreign investor, possibly for the government’s entire stake.
At an extraordinary general meeting on September 13 shareholders were asked to vote on a capital increase to which only the government could subscribe. They considered a resolution to issue 715,000 new shares to the ministry of finance, which will pay Lev1 a share, a total of Lev715,000 ($497,700).
According to the bourse, 67% of shareholders were present to vote, out of which just over 88% voted in favour of the capital increase. A total of 11% resisted the motion to increase the exchange’s capital from Lev5.87 million to Lev6.68 million. The effect is to raise the ministry’s stake from 43.97% to about 51%, wresting control from the other shareholders.
The plan had provoked an angry article in the Wall Street Journal on September 7, headlined ‘Save Bulgaria’s stock exchange’, written by Victor Papazov, the BSE’s former chairman and chief executive, and commentator Patrick Young.
The authors said the capital increase was priced at “an absurdly low valuation”, and that it would be “a disaster” – an unfair dilution of the existing owners’ holdings that would send a worrying signal to foreign and domestic investors in Bulgaria.
Saying the government risked being seen as a “robber baron”, the authors wrote: “The exchange’s value may be down from the up to €55 million estimated by a leading consulting firm at the height of the stock market boom in 2007. But the government’s claim that the exchange is worth just €2.8 million today beggars belief. The exchange has some €3.7 million in cash on its balance sheet, not to mention €1.5 million in property.”
Asked about the article, an insider at the stock exchange in Sofia said that “some shareholders were not happy that they cannot participate in the capital increase”, but that the valuation had been provided by “experts”.
The BSE insider said Papazov had been “forced to leave the exchange when the newly elected government changed the board in January this year during an extraordinary meeting”.
Boyko Borisov, leader of the centre-right Citizens for European Development of Bulgaria party, became prime minister in July 2009, ousting a Socialist-led coalition.
As Papazov explains in an interview with Futures and Options Intelligence: “Together with four other members of the board we were forced out. The minister of finance called an extraordinary general meeting on January 20 this year and just got us out. On the question what are the reasons, his representative said: ‘For the bad situation on the market.’ As if we are responsible that the market crashed!”
The BSE insider claims that Papazov was “the only one criticizing the government action” and said that Papazov still owned shares in BSE, even though his shareholding was “not significant”. Papazov confirmed that he still owns shares.
Angry investors
Some other shareholders have sympathy with Papazov. Ion Florescu, director of Reconstruction Capital II, an investment fund listed on London’s AIM, which owns just under 2% of the exchange, says: “None of the other stakeholders were consulted on this, and nobody in their right mind would agree to such a capital increase diluting their own stake.”
Asked about the value of the stock exchange, Florescu states: “We reckon it’s worth a huge amount more than the government wants to pay. We’ve done a valuation based on comparables and profitability, such as the Bucharest Stock Exchange, which is listed. We don’t believe the exchange is struggling in any way, so this is no proper valuation. In fact it has nothing to do with the market. The cited price is the legally set minimum notional value you have to pay under Bulgarian law.”
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“We are planning to have a strategic investor hold 50% of the BSE, with 50% free float listed on the stock exchange” Ivan Takev, BSE |
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Ivan Takev, chief executive of the BSE, responds: “The BSE provided its own valuation based on comparable stock exchanges in the region and came up with such a wide range of valuations that we decided to move forward at a nominal value of Lev1, whereas the book value of the shares is currently around Lev1.64. But under Bulgarian law, you can do a capital increase on a valuation lower than your book value. “The government chose to go through a capital increase rather than acquire stakes from the remaining shareholders as Bulgarian law creates various impediments against the government acquiring shares, so doing a capital increase was much faster and easier.”
Besides the government stake, 9.81% of the exchange was held by ‘legal entities’ as of June 30, according to the exchange’s half-year report; 6.66% by natural persons, 6.93% by institutional investors and 32.63% by investment intermediaries and commercial banks.
Papazov told FOI before the vote: “I expect resistance [to the capital increase] only from the foreign investors and a couple of local shareholders which are independent and brave enough to vote against. Most of the others will behave as conformists – most probably they will not show up at the meeting at all.”
Florescu says the “crass” action was not even necessary. “It’s bizarre as the amount of money involved is very small,” he said. “If the government wanted to increase its stake, we and other investors would have been quite happy to sell at a reasonable price.”
He also echoed Papazov’s position that the action violated good practice. “It’s scandalous to break the rules of corporate governance so blatantly, while at the same time aiming to get the stock exchange listed. Listed companies have to adhere to stricter governance rules. Breaking these rules just before a public listing doesn’t make sense.”
If some shareholders were willing to sell their stakes or parts of them to the government at a higher valuation, why did the government try to push the nationalization through at the nominal value of the shares?
“We think it’s just very poorly thought through,” says Florescu.
Seeking a foreign partner
Takev explains why the transaction was done. “The government increased its stake as a first step to exiting the stake,” he says. “The government feels that owning the majority of the stake will put it in a much stronger position to negotiate with a strategic investor, as 50% plus one share gives a strategic investor control of the exchange, whereas selling the original 44% stake would only make a strategic investor the largest shareholder.”
Asked what kind of strategic partner he wanted for the exchange, Takev responds that “we would prefer for the strategic investor to be a western European regulated market operator”.
Answering the same question, the BSE insider had said: “We do have some limitations in our legislation, but the most likely acquirer would be an exchange or a group of exchanges. Two to three years ago, during the great boom in exchanges, there were seven likely candidates. We were approached by players such as Nasdaq OMX, Deutsche Börse, Athens, Wiener Börse, Borsa Italiana, who were interested to buy part or all of the state’s stake. But with the onset of the financial crisis, the interest vanished.”
Takev admits that while the BSE had drawn some strategic interest from foreign firms before the crisis, there was no interest in acquiring the exchange at present.
The second resolution put before shareholders in mid-September started the procedure for turning the stock exchange into a public company, listed on its own market. This was accepted by 99% of the voters present, said the bourse.
Takev says the prospectus is written and only needs to be submitted to the authorities. He expresses his hope that the BSE could be listed by the end of the year. On the future ownership structure, he says: “We are planning to have a strategic investor hold 50%, with 50% free float listed on the stock exchange.
The BSE is already closely associated with Deutsche Börse; since June 2008 it has used the German exchange’s electronic trading system, Xetra. Asked if that made Deutsche Börse a prime candidate to take a large shareholding or ownership, the insider at BSE said the technology deal “had been one step in that direction, but it all depends on the Germans now”.
Papazov and Young did not mention in their article any plans to privatize the exchange after the government had taken control. They alleged that the government’s pretext for taking control was to protect the BSE from a hostile takeover after its listing, “never mind that current securities law forbids anyone from owning more than 5% of the shares without special permission from the Financial Supervision Commission”.
Asked to respond to the idea that the government might seek a new investor after the capital increase, Young says: “The whole plan is just to enrich the government. There are and were strategic investors always interested in the Bulgarian exchange, nobody had to forcibly dilute the other investors to do this, unless the real reason is to make the government money. That said, how many investors will make an investment in assets the government has ‘acquired’ in such a forcible fashion?”
The privatization is intended to modernize the stock exchange and develop the Bulgarian market, the BSE insider says, expressing the hope that the new owner would invest in the exchange and help educate and develop market participants. Among other initiatives, the exchange aims to introduce derivatives within the next two years.
Papazov counters: “The main point is that the stock exchange will become a state enterprise with all the negative consequences, like they should follow government regulation including salaries, etc. They will be obliged to pay the profit to the government to support the state budget. The second big problem is that after becoming a state corporation the government can’t sell the stake to a potential investor just like that. A long and complicated process of privatization should take place. This is something I am sure will prove to be an enormous problem at a later stage. We have some notorious examples from the last 20 years. I am afraid that BSE will become one of them.”
This article was first published by Futures and Options Intelligence (www.fointelligence.com) a Euromoney Institutional Investor publication of which Mareen Goebel is deputy editor.
