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Will listings of state-owned shares energise Bucharest market?

An ambitious privatisation programme could revitalise the Bucharest Stock Exchange, but there are still many hurdles in place preventing a boost in activity.
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The secondary public offering (SPO) of electricity distributor Transelectrica in March 2012 marked a potential breakthrough for the Bucharest Stock Exchange (BVB). The first listing of shares in a Romanian state-owned enterprise (SOE) since 2007 was 1.59 times oversubscribed, with the retail investor tranche 2.8 times oversubscribed. The offering, amounting to 15% of the company’s stock, raised almost €38m for the Romanian government.

This success, after the government was forced to cancel the sale of its 9.8% stake in oil company Petrom in June 2011 owing to insufficient demand, should provide a welcome boost to sentiment. It also opens the door to further planned secondary and initial public offerings in the coming months.

The government has already chosen Raiffeisen, pan-eastern European investment bank Wood & Co and Romania’s Banca Transilvania as deal managers for a 15% stake in gas distributor Transgaz; Erste Group Bank, Raiffeisen and Goldman Sachs for Black Sea and onshore gas producer Romgaz; and Société Générale, Citi, plus Romanian boutique investment bank Intercapital for hydropower company Hidroelectrica. A 10% stake in nuclear power plant operator Nuclearelectrica is also scheduled for sale at a later stage.

When we conducted an international roadshow we were presenting the whole privatisation programme to whet investor appetite

Lucian Anghel

“Allocations for the Transelectrica SPO were too small to suit some large international investors, so when we conducted an international roadshow we were presenting the whole privatisation programme to whet investor appetite,” says Lucian Anghel, chief economist of Erste’s local subsidiary, Banca Comerciala Romana.

Technical challenges

The Transelectrica deal, managed by Erste, Intercapital and another Romanian investment bank, Swiss Capital, was also important for ironing out some of the shortcomings in the operations of the Bucharest market. In a sign of the BVB’s transformation, Mr Anghel was elected non-executive president of the bourse at the start of 2012 – prior to that, none of the top five brokers on the market had been represented on its board.

The exchange authorities prevailed on the National Securities Commission and Romanian national bank to allow so-called turnaround trades, where foreign investors can register immediately for participation in the offering via local brokers. Previously, foreign funds were often excluded because they would have had to open an official account with a local broker, which could take as long as two months. Mr Anghel estimates that about 30% of the Transelectrica offering went to foreign investors, and that proportion is likely to rise significantly for some of the forthcoming deals – Romgaz and the power producers are much larger companies.

“The Romanian private pension fund sector has really only been operating for a few years, and can commit no more than a few million euros to each deal. Some of the larger offerings may need to consider a dual listing with a larger exchange, but the liquidity will still head back to the local market, because that is where the most active brokers are based,” says Florian Ilie, head of equity capital markets for ING Bank Romania.

There are other challenges that will need to be overcome. Narcisa Oprea, a capital markets partner at the Bucharest office of law firm Schoenherr who was also elected to the board of the BVB at the start of 2012, says the process of registering newly issued shares is still too cumbersome.

“Investors pay at the time of the offer, but shares are not fully registered and available to trade until three months after the offer, and investors do not qualify for any dividends that fall due during that period,” says Ms Oprea.

Mr Anghel says the wheels are already turning to reduce this lock-up period to about one week, but this may require legislative changes. He believes the Transelectrica deal should encourage private companies looking to raise smaller amounts that the BVB can supply them with a viable source of capital.

Corporate governance questions

For both private companies and SOEs, there are concerns about corporate governance procedures. The government strengthened the legal framework in 2011 with a new law that introduces formal review processes for the selection of boards and senior managers at SOEs, but will have to show that it can follow through on implementation.

“We have a good legal framework and a corporate governance code for the BVB that is in line with European standards, but there is room for improvement on compliance. We need educational efforts to make clear that strong governance is not a burden, but something that can help listed companies,” says Ms Oprea.

Transelectrica represented a rather uncertain start, because prime ministerial advisor Victor Vevera was parachuted in as chairman of the board in early 2012 without following the provisions of the new SOE law. This prompted an outcry from investor groups, and Mr Vevera resigned from the chair, but remained on the board. Mr Ilie at ING says the government’s decision to sell only 10% to 20% in each company planned for privatisation is a potential drawback.

“This will not necessarily bring the efficiency and governance improvements of a genuine privatisation, and it may not create a good free float to promote liquidity on the stock exchange. The government could get better results by selling 40% of a company, while still keeping overall shareholder control – as well as being the regulator for the energy sector,” he says.

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