Deutsche Bank (l-r): Gilles Ohana and Reinout Koopmans
When it decided to sell a slice of copper miner KGHM, Poland's government turned to Deutsche Bank, hoping that it would give the deal a more international approach as well as getting the timing of a potentially delicate deal just right. Writer Edward Russell-Walling
Poland is the shining light, relatively speaking, among central and eastern European markets right now. It is the only country in Europe to have escaped recession since the start of the financial crisis, but that does not mean its finances are in especially good shape. So the government has turned to privatisation to replenish its coffers, and Deutsche Bank has been helping it to adopt a more international approach to asset sales.
Given that Germany and Poland are next-door neighbours, it is no surprise that Deutsche is the most active foreign bank in Poland, with the possible exception of Citibank. It has a presence across the board, in retail, corporate and investment banking, fund management and property.
Last October, Deutsche was joint global co-ordinator and bookrunner, alongside Bank of America Merrill Lynch and UniCredit, on PKO's one-for-four 5.1bn zloty ($1.7bn) rights issue. This too marked a departure from local practice, being Poland's first international-style rights issue with a deeply discounted price - 33.5% to TERP (theoretical ex-rights price). The issue was 99% taken up.
The Polish government owns a little over 51% of PKO, the country's largest bank, and was keen to strengthen the bank's position. It effectively maintained its stake, so this was not a privatisation as such, but last year it raised some $3bn from privatisation sales. By 2011, as it tries to rein in its ballooning budget deficit and avoid increasing taxes, it hopes to have raised another $10bn or so. It kicked off this year with the surprise sale of a 10% stake in copper miner KGHM.
Selling a stake in KGHM
KGHM was first floated in 1997, becoming one of the Warsaw Stock Exchange's jewels, but the government retained a controlling 41.8% stake, before the latest sale. A new centre-right government promised to retain the holding when it took office two years ago, but then changed its mind last year, saying it would sell part or all of it. That plan ran into trouble with trade unions, who feared large job losses, and was seemingly postponed.
Last autumn, however, the government pressed on with the sale of stakes in other companies, not via a disciplined bookbuilding process but by the local practice of publicly inviting bids from brokers. It was not a particularly transparent process, did not maximise the prices realised and attracted few international investors.
"KGHM was very different," explains Reinout Koopmans, Deutsche's head of emerging Europe equity capital markets (ECM). "The government invited a number of brokers to put forward proposals on how it could monetise its stake in the company. But this was not a public exercise - it was highly confidential, as you would expect in international markets such as the UK or US."
The firms involved were Deutsche, which led the structuring of the transaction, Bank Zachodni WBK, Citigroup and ING. The first indications that a deal was in the offing came in September. "During those early discussions, the timing of the transaction was not known to us," says Mr Koopmans. "Would it be before Christmas? Possibly. But the timing was left in the air for a good reason - the possibility of a leak was very significant."
That did not stop the Polish rumour mill from grinding into action periodically. The deal could well have proceeded before Christmas, but each time the rumours broke out they depressed the price of KGHM's shares, causing any likelihood of launching the transaction to be deferred. That was frustrating for the government, which had a full privatisation programme lined up for 2010 and wanted to get this one out of the way.
"And then we got into the Christmas period, which is traditionally quiet, with Christmas parties and many people away," says Gilles Ohana, a director in Deutsche's London ECM team. The team was ready to go, but it was a question of finding the right window, when the international market was receptive and the share price was buoyant. Clearly, it wasn't going to be before the start of 2010.
International issue
In political terms, the government would normally have preferred a purely domestic issue - foreign ownership of national assets is never a great vote-winner. But this deal was simply too big to confine to the home market. It needed international support, which was another reason why it needed to be structured in a way that international investors were familiar with - which was an accelerated bookbuild.
As Mr Ohana notes, the easiest way to sell a small stake is to dribble it out into the market in stages. But with a large holding, this takes a long time, during which the share price is exposed to the vagaries of the market. Calling publicly for bids attracts a lot of publicity which, as the Polish government had discovered earlier, tends to have a negative effect on the share price. And a fully marketed offering, complete with roadshow and general pre-marketing, is usually a month-long process which, in this case, was not attractive to the Polish government.
"So the right way to do it was via an accelerated bookbuild," maintains Mr Ohana. "The targeting is very different - focusing on as many international and local investors as possible - and it takes place in a very short time, minimising the impact on the share price."
The confidentiality surrounding the timing applied to the company as well as to everyone else. KGHM's management were able to answer investors' questions, but they did not know when the deal would take place until the morning it was announced. That was on the Thursday of the first full week of January. With no pre-marketing, the announcement was accompanied by notice that the bookbuilding process would finish no later than noon the following day, Friday.
"We had two choices," says Mr Ohana. "We could go out with a price range, or say that the price would be referenced to the market price. We chose the latter. We went out with a size - up to 10% of the company - but no price guidance. So the market knew that the price would be as close as possible to the live price."
KGHM's shares closed at 109 zlotys the night before, so that was the reference point - the closer to it the team could get, the better. Some slippage was inevitable, and by Thursday night, now that the transaction was in the open, the stock was down to 104 zlotys, which wasn't bad under the circumstances. The teams chose then to close the books, rather than prolong the process until the following day, and the placing price was set at 103 zlotys - a 5.5% discount to the pre-announcement close. The sum raised was 2.06bn zlotys.
This was the largest accelerated bookbuild to date in Poland and was the first significant straight equity transaction in the Europe, Middle East and Africa region this year. Polish investors took 56% of the stock, so political honour was served, with 31% going to UK investors, 7% to the US and 6% to the rest of Europe. Long-only investors accounted for 70%.
The success of the KGHM process will do Warsaw no harm in its ambitions to become central and eastern Europe's premier marketplace. It is already drawing ahead of Vienna in terms of market cap and new issues, and is having some success attracting secondary listings from smaller markets such as the Baltics and Ukraine. And the government will no doubt use the accelerated bookbuilding process again as it pursues its privatisation agenda this year and next.
