Foreign investors have been getting excited about Polish stocks this year. Not only is GDP growth in Poland (7% in the first quarter of this year) the best in central and eastern Europe, but the stock market has developed into one of the region’s most liquid, with a large retail as well as institutional investor base. Poland also managed to stave off a Czech- or Thai-style attack on its currency from foreign speculators this summer.
But the main reason for foreign investors’ excitement was two big privatizations that came to the market within three weeks of each other this summer. First was the IPO of Bank Handlowy w Warsawy, followed three weeks later by KGHM, the seventh-largest copper-producing mine in the world.
Too much for the market?
Together they represented an increase of $1 billion in the stock exchange’s market capitalization. By comparison, $3 billion had been added in the first six months of the year, mostly through the listing of national investment funds (which hold stakes in smaller state-owned enterprises now being privatized). There had been few problems with such a gradual increase, but some were concerned that $1 billion from two issues within three weeks would be too much for the market. It helped enormously that it was the country’s highest-profile bank – Handlowy used to be the sole executor of foreign trade before 1989 – and KGHM, one of Poland’s main hard-currency earners, which were coming to market, but it was no clear-cut case. “There was some concern that the market didn’t need yet another bank stock,” says one banker in Warsaw. “And KGHM doesn’t offer good value relative to other mines around the world.”
No doubt one thing which secured success for both issues was their rarity value, both in Poland and in emerging Europe as a whole. “Deals such as Bank Handlowy are so few and far between that they are quickly snapped up,” says Jean Facon, co-head of investment banking-emerging markets at JP Morgan’s London office. “The market adopts a kind of must-have approach.” This was certainly the case for Bank Handlowy. The international tranche, offered as GDRs, was 17 times oversubscribed, while KGHM’s issue had four times as many applications as shares on offer.
In May, though, there had been some discussions between the two groups of lead-managers to make sure that the two issues did not come too close to one another. “We did get into a lot of work behind the scenes to make sure that we didn’t flood the market,” says David Dwek, vice-president and project leader for UBS, which with BZW was the global coordinator for the KGHM deal, and which was also involved in the syndicate for the international tranche of Handlowy’s IPO. “We agreed that the Handlowy deal would come forward a week and that ours would go back a week.”
Until this point it was not even clear which of the two would come first. The KGHM privatization had started in September 1996, before Handlowy’s, but was more complex to prepare. As the largest bank in Poland and the former foreign-trade bank, Handlowy had a head start. KGHM had to start from scratch. “Everything had to be done to the finest detail,” says Dwek. “KGHM was quite an insular company when we started. We had to get accounts drawn up to international standards, sort out the environmental concerns, and everything was conducted in Polish.”
Whether it would have mattered which of the two deals came first is a moot point. According to Harry Hampson, co-head of European equity capital markets at JP Morgan which was joint lead manager on the Handlowy IPO, it made more sense for a bank to come first: “Investing in Bank Handlowy is to take a position on the Polish economy as well as the bank, so the Polish story had to have a large profile in the presentations we gave for the international offering. KGHM, on the other hand, is a mining company which will by necessity be compared with other mining operations around the world, and is dependent on fluctuating commodity prices.”
This did deter certain groups of international investors from buying KGHM. Costs at the company are much higher than at comparable mines in Latin America or South Africa. The management has embarked on an ambitious restructuring programme to reduce costs, which includes cutting the workforce to 18,000 by 2000 (9,000 fewer than in 1996) and spinning off small non-core interests including a cellular phone company and a mutual insurance company. But three years was too long for some to wait. “We knew that some specialist mining investors could and did go elsewhere to get exposure to copper, but they weren’t completely negative about the deal,” says Charles Kirwan-Taylor, co-head of equity capital markets at BZW. “If they had been we couldn’t have got the emerging market investors on board – and they were our biggest single group of investors.”
And Kirwan-Taylor is keen to point out that KGHM was marketed as a Polish story: “We stressed that the macroeconomic fundamentals were the strongest in central Europe, and that the stock market was developing well thanks to the listing of national investment funds and other companies this year.” KGHM also had a rarity value which Handlowy did not. “We were always confident that a mining company in Poland would be of interest to international investors who wanted to diversify their portfolios,” he says. “It was the first chance they’d had to invest in a medium-sized non-financial company.”
But KGHM did benefit from the wave of enthusiasm about shares which Handlowy created. Priced at the top of the range at Z35 ($10.80 for GDRs), the Handlowy share price increased rapidly to Z42. “The price rise in the first week was a consequence of the huge interest in the issue,” says Hampson. “This put pressure on retail investors to sell and take their profits, putting the price down to Z39, but it’s now back to Z42 to Z43.”
An almost immediate increase of 22% was bound to attract investors to the next issue, although KGHM was not as oversubscribed as Handlowy. And investors looking for a quick buck were disappointed – the mining company’s shares now stand at Z22.5, having come to the market at Z21 (retail investors received a 9.5% discount on this price). Both teams now claim their deal was a textbook issue, and investors certainly appear to be happy. “Handlowy carries a quality distinction over the other banks listed here,” says Alicja Malecka, president and CEO of the Pioneer Fund in Poland. “This helped sell it both here and abroad. KGHM was appealing because it is one of the largest copper producers, and has a credible cost-cutting programme. But both also attracted large international interest because they were larger offerings than those normally seen in Poland.” Others were less generous about Handlowy: “Poland might not be as desperate for money as it used to be, but it doesn’t mean the government can afford to throw money away,” says one banker in London. “Twenty per cent of $450 million is enough to build a medium-sized hospital.”
That both were in general a success does not automatically mean that all state-owned enterprises in Poland will have an easy run if and when they are privatized. One company that investors have been waiting for is Lot, the Polish airline, but it is nearly four years since the idea was first mooted and there is still no sign of a sell-off. Big losses in 1996 made the need for new capital more urgent, but this is hardly likely to get investors excited. The government also intends to privatize the refining sector. Nafta Polska was set up last year to carry through the privatization. In itself this might only be of moderate interest to investors as there is an overcapacity of refineries in Europe. So the intention was to link the refineries with the distribution network, CPN. But CPN is reluctant to be split up or combined with other entities. “What form the downstream integration might take remains unclear,” says Dominique Chaffard, head of JP Morgan’s team in Warsaw. “The privatization might be harder to push through without clear downstream access to distribution.”
There are plans to float 20% of telecoms company TPSA early next year, and in 1995 the ministry of industry and trade announced that it wanted to sell a stake in the power industry to a foreign strategic investor. Plans for both of these deals are in constant flux, however. While such high-profile privatizations might be high on the wish-list of many international investors, those on the ground are not so convinced. “Foreign investors expect industries such as telecoms to be next because they’re seen as essential for smoothing the path for future privatizations and giving a fillip to the equity markets,” says Malecka. “But that’s not the case in Poland. The market has already proved that it can live off itself, with IPOs for small and large government holdings, national investment funds and private companies.” As proof of this, there are 80 or more companies lobbying the Securities and Exchange Commission to be allowed to list before the end of the year. “Of these, at least 60 are seeking a listing for the first time,” says Jarek Schorowski, Pioneer’s chief investment officer. “I would expect that there will be 40 more share offerings before the end of this year, with a combined market capitalization of around $1 billion.”
And the government is starting to look at the effect of privatizations on the economy. “They don’t need to privatize purely to raise money any more,” explains Malecka. Which is one reason why the telecoms company might be held back: the government might not be desperate for the capital, but can make very good use of the $500 million revenue a year which the company earns for the state.
