INDONESIA
Yearning to bring it back home
After two years of protracted negotiations, Merrill Lynch earlier this year celebrated its newly opened joint-venture securities operation in Jakarta. Its liaison with local tycoon Hashim Djojohadikusmo, whose PT Persada Kian Pasti Lestari owns 20% of the new firm, had helped it win Indonesia’s two most coveted privatization mandates to date – global coordinator on Indosat’s $1.16 billion offering in 1994 and joint global coordinator on last November’s $1.6 billion transaction for PT Telkom. Flush with over $50 million in fees from these two deals, it threw a lavish binge.
Catering was provided by the Grand Hyatt hotel, over $20,000 was spent on repainting the courtyard at the National Museum venue and, for $150, the services of a native “rain-stopper” were secured to prevent precipitation from marring the open-air event. But while the rain stayed away, so did the heavyweights of Indonesian business and finance. “Despite Hashim’s high profile [he is president Suharto’s son-in-law’s brother], it was a big no-show. Telecommunications minister Joop Ave was the only politician of note to put in an appearance,” says one guest from a rival investment bank.
The absence of the Indonesian glitterati, observers say, may portend significant changes in the government’s attitude to the awarding of privatization mandates. They point to lingering controversies surrounding the Telkom initial public offering (IPO) as the cause of the rethink. And they predict that a more restrained and inward-looking privatization programme will be the order of the day.
Telkom was, by contrast, a jamboree. The appointment of eight joint global lead-managers – including Goldman Sachs, Lehman Brothers, Merrill Lynch and SG Warburg – combined with a $7 million publicity campaign for the offering and a 10-month build-up, appeared excessive. It was exacerbated by inflated forecasts on the part of the underwriters which claimed that parlous domestic market conditions would not harm their projected $3 billion offering.
In the event, a day before the listing, the government cut the size of the international tranche by more than half to 30 million American depository shares and priced these at $18 – below the original indicated range. The size of the domestic portion was left unchanged at 1.17 billion shares though these too were priced under their indicated range at Rp2,050.
“In the end, the government had to intervene to save the day,” says Eugene Galbraith, president director of HG Asia Securities in Jakarta. “A lack of cooperation between the global coordinators and an over-complication in the deal’s structure made the underwriters look pretty bad. The government provided the only people constantly capable of making mature and consistently professional decisions in the deal.”
Perhaps ironically, these did not include the team of seven officials originally appointed to oversee the privatization. Particular casualties among the team – which was subsequently disbanded – were Martiono Hadianto, the director general of state-owned enterprises and Yusuf Anwar, the secretary-general of the finance ministry. Perhaps it was not a coincidence that both also had ties to global coordinators – local securities firms Bahana and Danareksa respectively.
“There was a growing sense of dismay from president Suharto downwards that the most important privatization to date was being handled badly,” says the head of corporate finance at one foreign securities house in Jakarta, “and that symbolic, if not material, changes had to be made.”
Future privatizations will now be overseen by Bacelius Ruru, formerly chairman of Bapepam (Indonesia’s equivalent of the Securities and Exchange Commission), under the direct guidance of finance minister Mar’ie Muhammad. Sources close to Telkom say that Mar’ie took it upon himself to “rescue” the deal.
Tighter control
The new supremos face a tough task. Four state-owned companies are scheduled for privatization in 1996 in deals that could raise as much as $2 billion. Analysts predict that Krakatau Steel (which is hoping to raise $500 million), Bank Negara Indonesia ($200 million), electricity generating company Perusahaan Listrik Negara ($1 billion) and toll road operator Jasa Marga ($300 million) will have difficulty coming to the market by the year-end.
“There is no way that the market could take all of these issues plus an anticipated second issue for Telkom in the first half,” says James Spence, head of research at WI Carr in Jakarta. “After two tough years, the market rose by 100 points between November and January precisely because there were no rights issues and initial public offerings. The government would be competing with itself in the market if it tried to achieve its privatization targets.”
There are already indications that Ruru and Mar’ie have imposed a slowdown in this programme. There have been no beauty contests announced for any of the IPO mandates while both Jasa Marga and PLN have only recently begun what are expected to be lengthy internal restructurings and due-diligence processes. Analysts also say that, in contrast to Indosat and Telkom, there will be more stress on using the privatizations to develop the domestic capital markets.
“BNI is most prepared to go to the market but the feeling is that there will only be a domestic listing,” says the regional financial analyst at a US investment bank. “This could well be a reaction to Telkom listing in London, New York and Jakarta and the unfortunate experience with Tambang Timah.” Timah, the formerly state-owned mining company, saw the share price of its $160 million IPO listed on the London Stock Exchange fall by 17% in the first five days of trading after its privatization last October.
“I suspect that there will be few dual listings of privatized companies in future,” agrees Galbraith. “Both Mar’ie and Ruru have made it clear that they want the proceeds of privatizations to benefit the growth of the domestic market as well as to buy down national debt [which stands at $100 billion]. And though there is no shortage of accommodating international financiers in town attempting to persuade them otherwise, they head a faction which believes that excessive overseas listings will in the end undermine the future advancement of the local market.” Tony Shale
HUNGARY
Hungary’s huge haul
In a matter of weeks at the end of last year, the Hungarian state sold as much property to foreign investors for hard currency as it had sold in the previous five years.
The $3.3 billion gravy train began rolling last summer when Hungary raised nearly $300 million from the sale of 33% of national savings bank OTP and 27% of state oil company MOL. In November, another $460 million came from the sale of stakes of 50% or greater in five regional gas distribution companies, with one company fetching fully four times the state’s minimum bid. In December, Hungary sold minority stakes in its electrical distribution companies and some of its power companies for a total of $1.3 billion. And as December ended, the government sold 37% of national phone company Matav for $850 million to Deutsche Telekom and Ameritech, which had together purchased 30% of the company in 1993.
The year-end privatization frenzy caught almost everyone by surprise. “The Hungarian government has had plans to sell MOL and the gas and electricity companies for so long,” says Frances Cloud, an analyst at Nomura Research Institute in London. “It’s been on and off, and on and off for years. At the beginning of the year when they were saying they would be selling them, I was thinking ‘oh yeah?’.”
Privatization officials were floored by the prices foreign investors bid, particularly for the gas and electrical utilities. The prices were really beautiful, says Peter Mihaly, chief economist at the APVRt (state privatization and holding company) which orchestrated the deals. “For the gas companies, we got 2.5 times what we projected in our internal plans and in the electrical companies, we got 50% more.”
Since these were the first sales in the region of such utilities, Mihaly hypothesizes that strategic investors – mostly from France, Germany and Italy – paid premiums in order to “plant their flags” in central Europe. “We underestimated the impatience of investors and the strategic importance of our companies,” he says. Hungary’s haul was doubly impressive when compared with the total foreign investment in other countries in the region. Only the Czech Republic came close to attracting as much foreign investment – pulling in $3 billion, according to a table in the European Bank for Reconstruction and Development’s (EBRD) 1995 transition report – but that was over a period of five years between 1989 and 1994. The next largest cash magnets, Poland and Russia, together attracted only $3.1 billion during the same period.
Hungary’s $3.3 billion haul in 1995 is particularly impressive considering the way the year began. At the end of 1994, the country’s top privatization official, Ferenc Bartha, resigned after Socialist prime minister Gyula Horn overruled the sale of a chain of 15 hotels called HungarHotels to a US company. For reneging on the deal, Horn and his Socialist team, who had campaigned as economic experts when they won elections in May 1994, were caricatured as ham-fisted statists.
Privatization enthusiast
Horn’s reputation with international investors fell further at the end of February when he appointed a small-town bank branch manager, Tamas Suchman, as minister in charge of privatization. Suchman, who spoke no foreign languages, was best known for his friendship with Horn.
Why exactly did Suchman, who many saw as an ally of union leaders and regulatory bureaucrats, confound expectations and command a privatization blitzkrieg? Some say he had marching orders from Horn, who had been scared into selling state assets for hard currency by the near-default of Mexico in 1994 and a realization that Hungary might be next. Others argue that Suchman hustled so that he could spend excess sales proceeds on infrastructure projects designed to boost the Socialist Party’s popularity. Speaking for himself, Suchman says that he realized privatization was the unavoidable route to a stronger economy and, in the long run, the avoidance of unemployment (see profile on page 52).
For whatever reason, Suchman is today the toast of the foreign investment community. The Hungarian state’s cupboard is considerably barer than it was a year ago. Indeed, of the more than 2,000 companies in the government’s portfolio in 1990, only 700 remain and only 400 are of any significant size.
In 1996, the state will auction electrical companies it did not succeed in selling in 1995: they have an estimated value of $425 million. Stakes in chemical companies Borshodchem and TVK might fetch another $100 million.
Someone might pay $70 million for a 50% stake in Antenna Hungaria, which holds the concession for broadcasting in Hungary. And ironically HungarHotels may finally be broken into its constituent parts, yielding at least $50 million.
With most of Hungary’s utilities now in foreign hands, one other significant class of state firm remains to be sold – the banks. The government hopes to peddle stakes in Hungarian Credit Bank (MHB) and the smaller Trade and Credit Bank (K&H) some time in 1996. But these sales may not take off, judging by the government’s luck with the late-1995 sale of Budapest Bank.
Budapest Bank was Lajos Bokros’s bank before he became finance minister last March. As its president, he had taken credit for reforming the institution, claiming that he had made it fit for purchase by a western partner. Budapest Bank was Hungary’s best bank, Bokros and others believed.
Shock pull-out
So it was a shock when Zurich-based giant Credit Suisse pulled out of negotiations to buy Budapest Bank shortly after completing due diligence last March. Swiss executives attributed the withdrawal to strategic incompatibilities, but Budapest Bank came away from the deal looking like damaged goods. The bank’s next suitor, Dutch bank ING, backed away too, saying that its staff were preoccupied with managing Barings.
In December, after marathon negotiations, the government finally sold Budapest Bank to the EBRD and General Electric Capital Corp. Although the investors spent $87 million for 70% of Budapest Bank, the sale brought the government nothing. The money simply paid back the $87 million it had injected into Budapest Bank a year ago to spruce up its balance sheet.
Does all this finagling to sell Hungary’s “best” bank bode ill for MHB and K&H? No, says Katalin Botos, who served as head of the state banking supervision agency in the early 1990s and is now a finance professor at Budapest’s University of Economics.
Lajos Bokros was a victim of his own public relations, Botos argues. “The whole government,” she says, “was under big prestige pressure” to sell Budapest Bank, which probably depressed the price. Things will now go better she believes, at least for MHB. MHB’s president, Zsigmond Jarai, she says, “is a clever boy. He understands the job and he has time to wait until he finds the correct partner. He is not under the time pressure and the prestige pressure.” Henry Copeland
PHILIPPINES
More optimism than realism
Privatization officials in the Philippines are on a high. After a year of stutters and stalls, they were able to celebrate the mid-December sale of 7.2 million shares in the 57% state-owned Philippine National Bank (PNB), raising Ps1.9 billion ($72.4 million). “It was a very successful deal,” says Crisanta Legaspi, executive officer of the committee on privatization at the department of finance in Manila. “Nineteen ninety four was our banner year with the Ps25 billion sale of Petron and the Ps15 billion sale of National Steel Company (NSC). Now we can look ahead to a pipeline of big-ticket offerings in 1996.”
But market practitioners who followed the PNB deal closely note that such optimism should be tempered by the fact that Filipino privatizations rarely go smoothly. PNB only made it to the market, for example, after ING Barings replaced original lead underwriter Salomon Brothers in the final stages of the deal and after the size of the deal was cut from 10.5 million shares.
Poor local market conditions (the Philippines composite index fell by 23% in the four months preceding the issue), analysts’ concern over last-minute changes to PNB’s balance sheet, and a government regulation preventing the bank from offering its shares at a discount, made the issue a touch-and-go affair. “Barings won the mandate in the end because it was in favour of going ahead,” says the president of one foreign securities house in Manila, “but many felt that the timing was all wrong.”
“It was a gutsy deal in the end and the pricing was right,” says Danilo Feliciano, director of corporate finance at Jardine Fleming Exchange Capital in Manila. “The inclusion of a 2.4 million tranche of warrants as a way around the discount ban was appreciated by investors.” A 41% rise in the share price in the improving market since issue supports his view.
Legaspi’s ebullience and the timing of the deal were also linked. The government needed the proceeds from PNB’s sale to guarantee a balanced budget for 1995. “Revenues generated by privatization have become the key to achieving a budget surplus,” says Erico Claudio, head of research at James Capel in Manila. From Ps1 billion or 0.2% of GNP in 1987, privatization proceeds are scheduled to account for Ps19.5 billion or 0.9% of GNP and 36.8% of non-tax government collections in 1996.
First off the block, according to Legaspi, could be a further sale of 5% of NSC (following the 75% offering in 1994), though corporate financiers in Manila are not holding their breath. First mooted in mid-October, there is still no sign of NSC listing on the Philippine Stock Exchange. And an estimated $175 million exchangeable bond for NSC to be led by Peregrine Capital has been similarly delayed. The deal involves the sale of 20% of Malaysian steel company Wing Tek’s 49% stake in NSC.
The government’s greatest hopes are pinned on the privatization of the $11 billion National Power Corporation (Napocor). But though Napocor has attracted international investor attention in the Euromarkets, principally through its $150 million yankee bond led by JP Morgan last July and a ¥11 billion dragon bond led by Nomura in November, the process of its restructuring and sale has been slow.
Legal and political wranglings
The award of a lead financial advisory mandate, for example, was initially scheduled to be made last November. Eight investment banks had combined to make six bids for the lucrative slot after Napocor had made international equity market history in the summer by demanding a non-refundable $50,000 from each bidder. But it was only in late January that Merrill Lynch found that its bid, in association with NM Rothschild, had been successful, beating Morgan Stanley, Jardine Fleming, SBC Warburg, BZW and Lehman Brothers in association with Kleinwort Benson.
Morgan Stanley was an unhappy loser – particularly since rival bankers had seen its staff arrive in Manila to make their presentation to Napocor sporting T-shirts emblazoned with the slogan, “Napocor Privatization Team Morgan Stanley”.
And locals were surprised at the winning line-up. “It is strange that banks with little or no physical presence and commitment in the Philippines should get the mandate,” says the head of corporate finance at one Manila-based foreign house. Julian Summer, head of equity corporate finance at Merrill Lynch in Hong Kong, demurs: “We have teamed up with Rothschilds on quite a few deals since our acquisition of Smith New Court, particularly on the CVRD mandate in Brazil. It is quite a logical and successful team.”
Merrill may have to wait even longer to recoup much of the $50,000. An omnibus bill which needs to pass through congress is not scheduled until the second quarter. “The first sale under the programme is expected to be Tiwi Makban Geothermal corporation,” says the head of international finance at one local bank, “but any forthcoming issue will need parliamentary consensus and that will be hard to find.”
Political considerations are still dogging the government’s proposed sale of its 51% stake in the Manila Hotel. Although an international consortium headed by the Renong group of Malaysia and ITT Sheraton made a successful bid for the stake last September at Ps673 million, the Manila Prince Hotel group (which bid Ps636 million) has sued to prevent the sale. In doing so, it has invoked a local law which promises favourable treatment to domestic companies bidding for privatization deals.
Legaspi says: “There is still a legal impediment and no specific timetable for the sale of the Manila Hotel.” But she also assures potential foreign buyers: “The government is very much in favour of foreign investment in all of its privatization projects.” TS
ZAMBIA
Copper heads the list
Privatization in Zambia shot ahead last year. More than 100 units were sold, leaving 200 still in government hands.
During the next few months, attention will focus on the sale of the Zambian Consolidated Copper Mines (ZCCM), an industry that generates 90% of Zambian exports. The government has put off the sale for several years but is now determined to finalize a deal as production levels are falling and the mines require investment for modernization.
“Given the situation ZCCM finds itself in at the moment,” says Jordan Soko, head of merchant banking at Stanbic in Lusaka, “investments will have to be made in 1996.”
Rothschild’s study of the mines – to be published this March – is looking at the two privatization options available: splitting ZCCM into separate units for sale independently or selling it as one unit.
At the moment, it appears that ZCCM will be split up, partly because of the proposed investment of Anglo American Corporation. Anglo American holds a minority stake in the mining group as well as pre-emptive rights and proposes to invest $600 million into Konkola Deep, a project set up to expand the Konkola mines. According to George Roberts, director of merchant banking at Barclays Bank in Lusaka, Anglo American’s involvement indicates it is in favour of splitting up ZCCM.
Although the publication of the report could be only weeks away, Soko at Stanbic believes a full-blown privatization of ZCCM may not happen this year. Elections in October may force the government to delay announcing an official programme. President Chilanga will be under pressure to reassure the electorate that economic hardships are coming to an end. The outcome could be that divisions of ZCCM are sold off without an encompassing plan.
Zamtel, Zambia’s telecommunications company, is also in line for privatization. Most shares in the company will go to a technical partner, but a small percentage will be sold to the public. Last February a stock exchange opened in Lusaka. Since then two companies have been floated, generating a mixed response from the public. Last April, 30% of Chilanga Cement was floated – the company was privatized in 1994 but 30% of the shares were kept in a privatization fund – and the issue was fully subscribed. Then, in November, the government floated the 18% of cigarette manufacturer Rothmans it owned. This issue, however, was not well received and was only half subscribed.
The timing of the Rothmans issue may have been one of the reasons for its failure. In the same month, Commerce Bank and Africa Commercial Bank were forced into receivership because they hadn’t met liquidity requirements. Since then, the situation seems to have stabilized: players in the market believe other bank failures are unlikely.
Investor education
Among others, Zambia Sugar and Zambia Breweries will be floated in 1996. Privatization of these two companies was completed last year and now the government is waiting for the best moment to approach the market.
The next large privatizations will set aside about 30% of companies’ shares to sell to the public. To this end, says Stuart Cruickshank, technical director of the Zambia Privatization Agency, the government has been making an effort to educate the public and promote the changes. Radio programmes and television plays have been broadcast to explain new concepts such as shareholding, and studies have been carried out to prove that privatization will not mean redundancies.
The government is likely to start selling off the electricity sector too. The electricity board has asked the government to develop a new hydroelectric power station. The project will involve heavy commitment from the private sector and could prove to be important to Zambia in the future – the country could well have sufficient capacity to export electricity to Namibia and South Africa.
Foreign investors are also on the government’s list. Many emerging market funds have been looking critically at Zambia. There is also dissatisfaction with the local stock market, which lacks liquidity. In all, only nine securities are traded on the exchange, the most active being Standard Chartered. In addition, local institutional investors have tended to hold on to their shares. Confidence in the Zambian economy as a whole should rise, however, now that the IMF has resumed its loans to the country. Elisa Martinuzzi
SOUTH AFRICA
Private virtues still in doubt
South Africa’s reconstruction and development programme is on hold. According to Niko Czytionka, group economist at Standard Bank in Johannesburg, opposition from the labour unions means that government and industry are already at loggerheads over the proposed changes.
The pace of the privatization programme – if not its future – now depends on negotiations between the government and the unions which, driven by fear of job losses, have been making their feelings known on protest marches.
Paul Slot, head of privatization at First National Bank in Johannesburg, is optimistic. “If the political will is strong, privatization will take place very fast,” he says. An agreement should be reached by the end of January, but a lack of unanimity within the government is increasing the friction. Opinions are wide-ranging: some politicians want full-blown privatization, others are completely against it. Only the cabinet seems determined to push ahead.
The government first called for tenders in December for advisers to assist its six task teams. Many domestic banks, the focus for the government’s selection, are expected to compete for the contract, but it will probably now be February before any advisers are appointed.
In the meantime, the government has been trying to push ahead with other aspects of privatization. So far, its move towards subcontracting has also met with resistance. The unions claim the rules are unclear, and it appears that subcontracting has also muddied the waters for potential asset sales.
One sale likely to go ahead this year is that of Telkom, South Africa’s telecommunications company. In line with the government’s enthusiasm for strategic partnerships (which facilitate the imposition of standards such as employment conditions on companies), Telkom will sell between 20% and 30% to a strategic partner. This January it received several submissions from potential buyers including prominent foreign telecom companies. Deutsche Telekom, Stet, AT&T and BT are thought to have submitted offers. Goldman Sachs, the adviser for the transaction, will draw up a list of four or five potential partners by January 25. If the regulatory and competitive environments are built up, Telkom’s plans for the deal to be completed by the second quarter may materialize.
Various small companies are also likely to be sold in the coming months. These will be enterprises that the government believes do not need to be under public policy. For the first half of 1996, the list includes Sun Air, Transkei Air and Autonet. The advantages of selling these assets are twofold: they should meet little resistance from the unions and they should prove the merits of privatization.
Another two or three such companies will follow before the end of the year, but the big sales will only come in 1997. According to Slot at First National Bank, the stock exchange is booming, but it is unlikely that there will be public offers of the assets. Any offers in the coming months will be to the labour unions. EM
GREECE
Better times ahead
In contrast to 1995, 1996 looks certain to be a better year for privatization in Greece. First, there has been a drive to privatize non-strategic state enterprises which are bleeding red ink. Second, some strategic state enterprises have been given the go-ahead to offer up to 49% of their shares to the public. This will give private investors increased control, and even management, without the state losing the companies completely, and the companies access to the know-how and capital required to compete in international markets. The State Telecommunications Company (OTE) and the State Petroleum Company (DEP) fall into this category.
With a float of between 8% and 9%, the part-privatization of OTE is likely to take place by the second quarter of 1996. It is intended that the small initial public offering will result in oversubscription in the local market – shares will be sold only locally – and the price, once stabilized, will form a starting point for future listings on overseas bourses.
The government has also earmarked some state-controlled banks for sale. It is likely that the small Bank of Attica will be partly privatized via a capital increase, after which 50% of its shares will be sold to a public fund and a private-sector retirement fund. At the moment, the bank’s major shareholder is the state-controlled Commercial Bank of Greece.
The dilution of the state-controlled Army Fund’s stake in the General Bank of Greece, from 68.5% to 51%, has almost been completed. The balance will probably go to another Greek private banking group, or even foreign strategic investors.
Another state bank ready to be privatized is the scandal-ridden Bank of Crete, which has been cleansed of its sins – and its huge debts – by an act of parliament.
The country’s largest bank, the National Bank of Greece, has issued bonds convertible to common shares, with the first coupon expiring in 1996 at Dr15,000 per share and the second coupon expiring in 1998 at Dr7,500 per share. The economics ministry, which has the bonds in its possession, is planning to exercise its rights and will probably sell the shares to foreign investors.
Other privatizations close to completion include Macedonian Textiles, textile-dye company Ilionfin, cement firm Tsimenta Chalkidos, winery Kampas and Cassandra Gold Mines – all of which are now in the hands of the National Bank of Greece. The other state banks are also planning to privatize most of their non-banking subsidiaries.
Companies that have to overcome big hurdles before they can be privatized successfully include the one-time premier textile company Piraiki-Patraiki, metal industry Larko, hygiene industry Kerafina, paper mill Softex and Elevsis Shipyards. All these cases are hard to crack and will test the Greek government’s resolve to proceed with the much-needed privatization drive. Stefanos Kotzamanis
