Type of deal: attempted purchase
Acquirer: Nomura International
Target: Bulgaria Post Bank
For 10 days at the end of June Nomura International was the most important bank in Bulgaria. Not perhaps the most impressive claim in world banking, but in the context of Nomura’s burgeoning eastern European business it was another important milestone. In the past 18 months the bank had made a string of acquisitions in the Czech Republic, Poland and Romania. Bulgaria was its next target.
In February, Nomura’s bid for the government’s majority stake in Bulgaria Post Bank (BPB) – one of the most attractive banking franchises in the country – was preferred by the Bank Consolidation Company (BCC) over three rival offers. After nearly four months of negotiation, Nomura was awaiting the formality of the next BCC board meeting, scheduled for July 1, when it expected its purchase of BPB to be confirmed.
The other major privatization due to take place was of tobacco company Bulgartabac (BT). As that company contributes 5% to 6% of Bulgaria’s GDP and 4% of all budget revenues, it will be the most significant deal to come out of Bulgaria to date. On June 22 it was announced that Nomura had won the beauty parade for the advisory mandate.
But in the space of a few hours on July 1, the two deals began to slip from Nomura’s grasp. First to go was the Bulgartabac advisory mandate. The supervisory board of Bulgaria’s Privatization Agency (PA) revoked the PA committee’s earlier decision and the beauty parade was thrown back open to the top three contestants: Nomura, Merrill Lynch and a consortium of Creditanstalt and Dresdner Kleinwort Benson. Later the same day, the BCC announced that it would be extending its negotiation period with Nomura by 10 days in order to resolve outstanding issues concerning the sale of BPB. Nomura didn’t know it then, but this delay marked the beginning of the end for its bid to buy the state’s 78.2% stake in BPB. By the end of the month it had withdrawn from the tender, citing an “irretrievably compromised” position.
The sale of BPB continued without Nomura’s participation. On August 14, in the Black Sea resort of Varna, the BCC signed a stock-purchase agreement with American Life Insurance Company (Alico), a member of the American International Group (AIG), and Consolidated Eurofinance Holdings (CEH), a Luxembourg-based company owned by Eurobank of Greece. In the initial tender, this partnership had been ranked third, behind both Nomura and the National Bank of Greece (NBG).
Two months on from the collapse of its bid, Nomura still claims that it is no nearer to understanding quite why the deal went wrong. In a country that one analyst calls “the home of conspiracy theories” there are plenty of people willing to give credence to the idea of a plot against Nomura. Some participants suggest that the Bulgarian government was seduced by the notion of attracting a prestigious American bidder such as AIG and favoured it all along. Bulgarian privatization has a history of deals that fall through at the last, as only one completed deal in the eight years since communism collapsed testifies. According to Douglas Dryden, chairman of Raiffeisenbank (Bulgaria): “[The Bulgarian government] can never accept that something is worth the price that it really is.” Hence the tendency to reopen deals and the reluctance to finally sign on the dotted line.
Nomura is playing to perfection its role as the cruelly spurned suitor. “We lose deals regularly. But here we won fair and square. We made all the right commitments,” says Claus Mansfeldt, director at Nomura International. The bank even shows signs of being infected by Bulgarian conspiracy fever, noting the “coincidences” between the loss of both the BPB deal and the BT mandate.
But a different analysis suggests that Nomura’s failure to clinch the BPB deal resulted from a lack of attention to key details and a failure to win government favour for its aggressive investment style. Nomura’s rapid expansion in central and eastern Europe has been modelled on the approach of its successful UK-based principal finance team: buy direct stakes in companies, restructure rapidly and exit for a hefty profit. It’s not a way of doing business that the region has often seen before. As one competitor points out: “There are a lot of banks – especially conservative European ones – that don’t like Nomura, that think they’re too aggressive. They see this as Nomura getting its comeuppance.”
Amid the speculation and recrimination, the BCC has remained unbowed. Indeed its head, Peter Jotev, defends the company’s actions, arguing that: “The BCC has a clear and transparent procedure.” That’s some claim, given the convoluted story of the BPB deal.
It began in September 1997, with the Berents Group, the only adviser used by the BCC and paid for by the US Agency for International Development, advertising the sale in the international press. By the December 30 deadline the BCC had received only two bids: from Nomura and from NBG supported by the EBRD.
A prompt decision was expected but on January 16 the BCC announced that it was reopening the tender and that January 30 would be the new deadline for bids. “Everyone was very angry; ourselves, Nomura and the EBRD,” recalls Christos Katsanis, regional director of NBG.
According to Alan Hawkins, Berents Group senior adviser to the BCC, the tender was reopened because major alterations to Bulgarian accounting rules radically altered BPB’s earnings and capital structure for 1997. “If everyone was given the same opportunity to submit a revised bid it doesn’t justify a complaint,” argues Hawkins. He says that bids were substantially increased by the end of the month. For its part, Nomura says it submitted exactly the same bid as on December 30.
But as well as the bids from Nomura and NBG, on January 30 the BCC received two further bids: one from a small local bank, Evrobank (described by one banker as “the goofy bid”); the other from the consortium of Alico and CEH. According to a source at one of the interested parties, the initial tender extension “was a really bad sign. It showed [the BCC] was concerned with the names behind the bids.” In particular, there was a feeling among the other bidders that the tender had been extended to enable Alico-CEH to table an offer.
Still on February 20 Nomura was announced as the BCC’s preferred bidder, with NBG ranked second and Alico-CEH third. It seemed that enabling the Alico-CEH bid had been, if anything, simply an exercise in raising the profile of the Bulgarian privatization by linking it to a prestigious international name.
The main problem that Nomura faced in the early months of negotiations was assessing the real financial status of BPB. An IAS audit of the bank only became available in April. It revealed that although the bank’s balance sheet displayed net assets of around $40 billion, the true value of around half of those assets was unknown. Nomura found net assets worth only $24 million, compared with its bid of $24.2 million plus a capital increase of $20 million. “We found ourselves in the position of paying premium to book,” says Mansfeldt. “But we were willing to do so because there was franchise value here.” That value was mostly contained in the post office network of nearly 3,000 branches, by which BPB gained access to retail investors.
Here Nomura discovered another hole: the contract between BPB and Bulgarian Post. At present, the bank paid the post offices according to an economic formula relating to the turnover in deposit accounts, rather than the total volume of deposits. But turnover could easily increase without any rise in the volume of deposits. Nomura wanted a different calculation method.
The contract was also renegotiated annually. Nomura viewed such a short-term agreement as unacceptable. If BPB’s potential future value was closely tied to the postal network, Nomura wanted to make sure that the network was closely tied to the bank. The prospect of a profitable exit from BPB was dependent on being able to harness, promote and then sell the potential of its retail network.
When Nomura’s 90-day exclusivity period expired on June 10, little, it seemed, had been agreed. Both Nomura and the BCC lay the blame for the sluggish progress at the other’s door. Regardless of who was the culprit, there followed a period of frenetic activity.
By June 22, when the Bulgartabac mandate was announced, nearly all the outstanding issues regarding BPB had been resolved. Four days later the final sticking point was removed: Nomura agreed to lock up its investment in BPB until December 1999. The deal, it felt, was done.
On July 2, Nomura received a letter from Jotev stating that although the board of the BCC was satisfied with the general terms of Nomura’s share-purchase agreement, it had reservations on two points: it was insistent that Nomura should remain the majority shareholder of BPB for a minimum of two years; and it wanted the investment commitments included in Nomura’s original business plan to be written into the agreement. It gave 10 days for an agreement to be reached on these issues, or else negotiations would be reopened with the other two bidders. On July 3, Nomura agreed to both conditions, sending Jotev confirmation in writing.
But during the next two weeks, Nomura’s bid for BPB gradually unravelled. On July 17 the board of the BCC met and announced that Nomura had lost its position as preferred bidder. The tender was to be reopened again, to Nomura, NBG and Alico-CEH, with bids to be submitted by the end of the month. The BCC gave two quite new reasons for the decision, citing the fact that Nomura was seeking to purchase BPB through an offshore acquisition vehicle, and that Nomura had failed to reach an agreement with the Bulgarian post office.
What happened during that two-week period to turn Nomura’s apparently winning position on its head? According to Mansfeldt: “We thought the Post Bank deal was still going to happen. We made all kinds of efforts to alleviate the outstanding issues, to make sure that we gave the BCC no excuses. But the more we did that the more difficult it got.”
According to Hawkins: “The one thing that really caused the deal to collapse was the contract with the post office.” Negotiations with the post office had become protracted and difficult. But Nomura maintains that at no point did it feel they had reached an impasse. When Jotev raised the issue of slow progress in early July, negotiations between BPB and the Post were continuing. Nomura told the BCC that it hoped the negotiations would be concluded before the signing of the stock-purchase agreement, but if that was not the case the successful completion of negotiations would be a condition of Nomura closing the deal.
This is the condition that the BCC found wholly unacceptable. “Nomura would have been put in an unacceptably strong position,” says Jotev. According to the BCC, Nomura had wanted an extra 120-day period in which to complete negotiations with Bulgarian Post. As they saw it, this amounted to a further four months of uncertainty at the end of which it might have to reopen the tender again. Instead, it decided to reopen the tender immediately.
Nomura argues that the 120-day timeframe is a fabrication. It never stated such a period and was expecting to close the negotiations within a fortnight. And yet considering how integral the post office contract was to the deal, one can question Nomura’s apparently relaxed approach to the negotiations.
On August 6, it was announced that BPB would be sold to Alico-CEH for $38.2 million, plus $20 million in capital increases and 10% of BPB’s net profits to be paid to the Bulgarian state for the next five years. “To turn around and reopen the process seems absurd, but on the other hand the BCC got good bids,” observes one banker. “If you’re a Bulgarian taxpayer you should be happy.”
Nomura’s downfall in Bulgaria raises questions over its general strategy in central and eastern Europe. “It is just an intermediary buyer,” says one banker. “The government doesn’t want someone who might resell the bank at a vastly higher price just before an election.” It is a suggestion confirmed by Jotev. “If they had said at the beginning that they only wanted to buy the bank for two years then they wouldn’t even have been listed,” he says. “Not even as second or third bidder. Not at all.”
And yet Nomura continues to feel hard done by. “What is a strategic investor anyway?” asks Mansfeldt. “It is an investor with the capital to support the turnaround and growth of a business, and with the ability to transfer the best of available business skills. People often confuse it with an investor that comes in and rebrands a company and sacks most of its staff.”
The victory of Alico-CEH revived suspicions that the Bulgarian government had favoured the involvement of AIG all along, ever since the BCC reopened the first tender and allowed Alico-CEH to bid. If that was the case, then it appears that the government ended up with little more than the AIG name. “We definitely have the feeling that they would have preferred an investor from core western Europe or the US,” says Katsanis. “But at the end of the day, Post Bank was purchased by Greeks.” CEH is owned by the Greek Eurobank, part of the growing empire of the Latsis family.
