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Privatization in CEE

Privatization in CEE. Giovanni Salvetti, Managing Director, CEE Coordinator. AFG. 22 October 2009. Contents. Introduction to Rothschild Privatization in CEE The Belorussian case Focus on the financial sector Conclusions. 1. 2. 3. 4. 5.

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Privatization in CEE

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  1. Privatization in CEE Giovanni Salvetti, Managing Director, CEE Coordinator AFG 22 October 2009

  2. Contents • Introduction to Rothschild • Privatization in CEE • The Belorussian case • Focus on the financial sector • Conclusions 1 2 3 4 5

  3. The Rothschilds supply gold to Wellington. The Napoleonic War brought opportunities for the Rothschilds to engage with governments across Europe Banque Rothschild establishes Imétal, leading mining and industrial materials distributor companies De Rothschild Frères finances the Nord Line, the first railway in the Habsburg Empire connecting Vienna with Brno Mayer Amschel Rothschild becomes Court Agent. His five sons later establish offices across Europe Rothschild becomes involved in oil exploration in Russian Empire Lionel de Rothschild elected member of the English Parliament 1. The Rothschild Group 1.1 A distinguished history – few key dates 1815 1847 1883 1962 1769 1845 220p 240p 260p 280p 300p 320p 340p 360p 380p Currently, Rothschild has become a leading sovereign advisor globally and especially in the Central and Eastern Europe

  4. Offices 1. The Rothschild Group 1.2 Strong international network with major European presence and strong local footprint Corporate finance bankers • 950 corporate finance bankers worldwide • 640 in Europe including CEE and Russia • 125 in US and Canada • 95 in Asia • 30 in Australia • 25 in Latin America • 35 in Africa and ME 48 Rothschild’s offices in 34 countries Over 3,000 employees of which c. 950 bankers

  5. M&A, Privatizations Advisers of choice to corporates individuals & governments, often on a repeat basis. Applying knowledge & insight to M&A and strategic advice Equity Debt Europe’s leading practice, advising on objectives, strategy, providers, products & terms Experienced teams close to the markets, advising on valuation, tactics, execution, implementation Restructuring Market leading adviser to all Participants in restructuring situations, drawing on M&A and Debt Advisory expertise 1. The Rothschild Group 1.3 Integrated corporate finance advice across: Completed deals by number (1 Jan to 31 Dec 2008) Source Thomson Reuters 2 Jan 2009 Completed deals by number (1 Jan 2000 to 31 Dec 2008) Source Thomson Reuters 5 Jan 2009

  6. 1. The Rothschild Group 1.4 Awards as strong testimony of Rothschild excellence Debt Advisory House of the Year Restructuring Adviser of the year Cross-border Deal of the Year: Scottish & Newcastle Deals of the Year 2008: UK: Tata / Corus Debt Advisory House of the Year German M&A Adviser of the Year Health & Pharma Adviser of the Year Restructuring Deal of the Year: Eurotunnel Defence of the Year: Altadis Private Equity.fr 2009 & 2007 M&A Adviser of the Year M&A Bank of the Year France and Latin America Investment Bank of the Year 2009 2008 & 2007 UK Financial Adviser 2008 Italy Financial Adviser 2008 Visegrad Financial Adviser 2008 & 2007 Mid-market Adviser 2009 Best International Investment Bank in Italy Euromoney Awards for Excellence2009 Best Global Sovereign Advisory 2009 Best LBO Advisory Bank of the Year 2009 Restructuring House of the Year

  7. 2. Rothschild’s government advise 2.1 Leading privatization adviser Countries in which Rothschild has advised on privatisations (incl. M&A transactions) North America No.of countries: 6 No. of transactions: 29 Amount raised (US$bn): 10.7 Europe No.of countries: 27 No. of transactions: 186 Amount raised (US$bn):464.1 Asia No.of countries: 9 No. of transactions: 40 Amount raised (US$bn): 190.9 South America No.of countries: 7 No. of transactions: 47 Amount raised (US$bn): 28.3 Middle East and Africa No.of countries:14 No. of transactions: 32 Amount raised (US$bn): 4.8 Australia & NZ No.of countries: 2 No. of transactions: 29 Amount raised (US$bn): 39.3

  8. 2008: acquisition of 75% stake in CTL Logistics S.A. 3. Rothschild CEE expertise 3.1 Rothschild’s activity in CEE region Poland Romania 2006: € 3.75bn acquisition of 62% stake in Banca Comerciala Romana 2005: US$47.3m disposal of 78.5% of stake in Romportmet 2008: Advisory on disposal of Romanian second largest insurer 2007: Acquisition of a 93.32% stake in Kandia-Excelent 2005: €430m merger with HVB Bank Romania 2008: Acquisition of DISA from Procuritas Capital Investors 2007: €64m disposal of 60% stake in Agros Nova Ukraine 2007: Sale of 60% of Expander by GE Money to Innova Capital 2007: $5.4 bn combination with Gedeon Richter 2007: €122m disposal of PTE Skarbiec Emerytura to Aegon 2009: Restructuring of Nadra bank debt with Export Credit Agencies 2007: Acquisition of Funni Corporation, the 4th largest Ukrainian dairy company 2008: US$750m disposal of Pravex Bank to Intesa Sanpaolo SpA 2007: Disposal of Dominet Bank by Cacek Family andMerrill Lynch 2006: US$44.6m opinion on disposal of asset mgmt operations 2006: €123m offer for Broker Fm Russia 2009: combining Telenor’s and Altimo’s holdings in OJSC VimpelCom and Kyivstar 2005: Acquisition of Ukrainian P&C insurer Skide West 2006: US$1.2bn acquisition of a majority stake in Ukrsotsbank Czech Rep. 2006: €82.6m fairness opinion on public tender offer for 13.01% of Netia Estonia 2006: €52m disposal of Skarbiec assetmgmtholding 2005:€172m merger with Provimi Polska Latvia Lithuania Hungary Belarus Czech Republic Poland Ukraine Czech Republic 2006: £1.3bn acquisition of a 75% stake in Budapest Airport 2004: Acquisition ofjuice producer Olympus Top 2006: €120m disposal of a 50% stake in Modra Pyramida Stavebni Sporitelna Current: €2.3bn recommended cash offer for Zentiva NV by Sanofi-Aventis S.A. Slovakia Moldova Hungary Slovenia Romania Croatia Bulgaria Serbia Bosnia and Herzegovina Bulgaria 2004: Acquisition of food brands Sunar, Sunarek & Sunarka from Heinz 2006: Acquisition of Transcentrum Bus s.r.o. Macedonia 2006: €157.7m acquisition of a 74.3% stake in DZI Bank Albania 2004: Acquisition of Queens Juices Slovenia Croatia Albania Serbia Lithuania 2006: US$40.8m disposal of a 80% stake in Banca Italo Albanese 2005: Advisory to Banca Intesa on Delta Banka acquisition Government of Serbia 2003: Advisory on the restructuring of NIS - oil company Government of Serbia 2006: €1.51bn disposal of Mobi 63 Government of Slovenia 2002: €435m privatisation of 34% in Nova Banka to KBC 2007: Acquisition of 91% of Dukat (EV of €345m) 2004: Acquisition of Nord / LB insurance operations

  9. 4. Privatization in CEE 4.1 Key phases • Privatization is a key pillar of the economic transformation programmes launched by CEE governments in early 1990s • All CEE privatization programs started almost simultaneously during 1989-1992 • In general, almost all CEE governments applied a very similar mix of methods to privatize their economies with slight but in some cases sensible differences in their implementation • Early and mid 90s were marked by: • Mass voucher privatizations across the region (with some rare exceptions), mainly driven by social and economic transformation needs • The first CEE pilot privatizations (5-10 companies) using controlled method (trade sales and IPOs) • Active management and employees buyouts (the most fast and simple way to privatize the companies which were risking to go into bankruptcy) • Establishment of stock exchange and capital market infrastructure • In late 90s and until 2007 CEE privatizations were dominated by controlled methods, aiming to maximise proceeds and develop local stock market through "national champions" listings

  10. 4. Privatization in CEE 4.2 Disclosed privatization proceeds in CEE: landscape Estonia Russia Latvia Lithuania Belarus Poland Ukraine Czech Republic Slovakia Moldova Hungary Romania Slovenia Croatia Serbia Bulgaria Bosnia and Herzegovina Albania Macedonia Total proceeds 1989-2007 < USD 5 bn Source World Bank > USD 5 bn > USD 10 bn > USD 20 bn

  11. 4. Privatization in CEE 4.3 Current landscape: private sector development Private share in GDP (%) 2008 private share in GDP (%) Source EBRD Source EBRD CEE governments economic transformation efforts resulted in a robust private sector development which 2008 accounted for average 70% of GDP

  12. 4. Privatization in CEE 4.4 Privatization methods: voucher/coupon Voucher method Implementation • This method was widely spread at the first stage of CEE privatizations in early 1990s • Main goal: • Quick and socially fair transfer of state controlled companies to private ownership • Establishment of economically independent and competitive businesses, capable to mobilize / manage effectively the available resources • Fast establishment of a local capital market and stock exchange • Applied widely in CEE and Russia but to a lesser extend in Poland and Hungary • Managing entity: various but generally Ministry of Finance, Economy and Treasure, Privatization Agency (PA) • State companies were transformed into joint stock companies • Employees and all citizens were offered vouchers (freely transferrable), convertible through auctions into shares of selected state-owned companies • Two options for voucher holders: • To put vouchers into specially created mutual funds (i.e. Poland) to which the companies’ stakes are assigned • To sell them to other individuals (i.e. Russia), to private funds, and brokers (i.e. Russia, Czech Republic)

  13. 4. Privatization in CEE 4.4 Privatization methods: voucher/coupon (cont’d) Pros of voucher/coupon method Cons of voucher/coupon method • Push for local capital market development (i.e. Poland) • Quick transformation into private ownership • Encouraging the ownership of shares among the broad layers of the population • Low proceeds and high management costs • Weak legal framework of vouchers trading (i.e. in Ukraine vouchers were personally assigned to every citizen and could be sold only through a complicated auction system) • No guarantee of management efficiency improvement • No large scale restructuring • No guarantee for further investment plans / recapitalizations  • Investment funds were often favoured comparing to citizens (i.e. Czech Republic) • Excessive fragmentation of the ownership • In certain cases resulted in unfair redistribution of wealth

  14. 4. Privatization in CEE 4.5 Privatization methods: controlled method Controlled method Implementation • Consisted in selling selected state-owned companies to strategic investors (mainly Western) through: • Trade sale (tenders, auctions) prevailing method • IPO (mainly in Poland) • Main goal: • To maximize proceeds for the budget (i.e. Hungary was avoiding default in the 90s) • To improve management and overall operating efficiency • To support capital market development and set up standards • Applied in all of CEE countries and mainly in parallel with mass voucher privatization and in particular in Poland • Managing entity: various but generally Ministry of Finance, Economy and Treasure, Privatization Agency (PA) • Financial advisers involvement • The sale was carried out through transparent auctions • Mainly controlling stakes were sold • The process was often sector driven • Driven by foreign investors • Process organized and financed by: • Governments • International funds (i.e. $50m Margaret Thatcher fund for Poland; USAID, ECPHARE in Hungary and Bulgaria)

  15. 4. Privatization in CEE 4.5 Privatization methods: controlled method (cont’d) Pros of controlled method Cons of controlled method • Higher proceeds for the state budget • Management and efficiency improvement • Access to investors capital • Establishment of a stock market in the case of IPOs • Higher dependence on foreign multinationals in case of trade sale of controlling stakes • Required more time to be implemented

  16. 5. Privatization in Belarus 5.1 Importance of pilot privatization projects • A pilot privatization project ("Pilot") is a very important step and one of the first elements in the "to do’s" list for achieving general privatization programme success • The main idea is to start a broad privatization programme by first running an exemplary, well managed and successful privatization process (or a number of processes) that will result in a positive chain effect for similar processes in future and for national investment climate in general • Key objectives of a "Pilot": • To demonstrate the feasibility and benefits of privatisation and to create a successful precedent for future privatization processes • To raise the country’s profile among investors • To test various techniques of reaching different investors • To be a catalyst for establishment / improvement of investment and institutional infrastructure • To achieve an important learning effect and to train personnel to continue the process in future A successful pilot privatization project in Belarus will create a precedent for future privatization processes and raise the profile of the country among investors

  17. 5. Privatization in Belarus 5.2 Pilot privatization project: general process Government Political level • Support and strong commitment • Establishment of institutional infrastructure for the process (PA) and legal framework PA Advisers Operational management Companies selection Pre-privatization work Process management Post-privatization Process • Small number of companies • Criteria of quality of management, financial soundness, ability to export, etc • Privatization method selection (trade sale, IPO, stake, etc) • Due diligence • Restructuring • Valuation • Communication to the market ,etc • Presence of experienced and dedicated team • Realistic timetable • Efficient coordination and communication • Effectively adressing post-privatization issues • Regular monitoring of the situation Assets

  18. 5. Privatization in Belarus 5.3 Pilot privatization project in Poland: snapshot • Was launched in early 1990s on the back of successful Parliament voting for a Privatization law • The project lasted 1 year and consisted in running parallel privatizations of 10 companies: • 5 IPO’s • 5 trade sales • Were selected national companies meeting certain criteria of quality of management, financial soundness, ability to export, etc • A list of advisers were assigned to consult the Ministry of Privatization • Result: • Selected companies were successfully privatized • Demonstration of different privatization methods and know-how transfer • Contribution to development of an investment culture and infrastructure in the Polish economy • Creation of some of the capital market institutions

  19. 5. Privatization in Belarus 5.4 Importance of creation of local stock exchange • Stock markets have played an important role in the development of the CEE and CIS regional economies • Providers of capital to listed companies • Encourages local stock ownership and capital accumulation • Supports the development of domestic pension fund system • Listing imposes greater financial discipline on companies • Creation of a sector (brokers, funds, investment banks etc.) • Traditionally, privatizations through IPOs were chosen by CEE governments with a goal to boost the development of the domestic stock market. Successful listings of "local champions" were expected to give an important momentum to the market : PKN, MOL, CEZ, Gedeon Richter, Krka and of course regional banks such as PKO, OTP, Sberbank, VTB, and others • Well run and high profile IPOs of large and mid cap companies would enable the creation of a Belorussian stock market

  20. 5. Privatization in Belarus 5.5 CEE stock markets landscape Total peers stock market values as of 20.10.2009, USD bn Total TOP 5: 95% of peers stock market value Source Stock Exchanges, Bloomberg In Russia, Poland, Czech Republic, Croatia and Hungary stock markets were established in early stage of privatization and gained important momentum due to "national champions" listings

  21. 6. Focus on the financial sector 6.1 Waves of privatization in financial sector CEE takeover privatization “waves” CEE landscape Estonia Latvia Russia Lithuania Belarus Poland Ukraine Czech Republic Slovakia Moldova Hungary Romania Slovenia Croatia Bosnia and Herzegovina Bulgaria Serbia Macedonia Albania Turkey • Notes • Table depicts acquisitions of significant (>10%) initial stakes in local banks by non-local financial institutions • Source Thompson Research, Rothschild Four acquisition “waves” over the last 10 years in which the vast majority of players were (partly) acquired by Western banking groups

  22. 6. Focus on the financial sector 6.1 Waves of privatization in financial sector (cont’d) • The privatization of banking assets represents a delicate phase of any privatization programme • Banks are infrastructure assets in any economy. They need to be well and carefully managed • Necessity of existence of a solid and reliable regulator (central bank) • Anyway the privatization of the financial sector is a natural step that makes sense to implement • Global business with regional synergies • Easier access to foreign funding? Yes, but not always • Demand • Value

  23. 6. Focus on the financial sector 6.2 Potential scenario for Belarus banking sector - short and medium term timeline

  24. 7. Conclusions • If the Government decides to take the privatization way it has the possibility of looking at several examples and previous experiences in the region and avoid the mistakes done elsewhere • A controlled privatization program starting with some pilot projects (5-10 cases) is probably the best way forward • The establishment of an effective local stock market is a great opportunity to develop a national capital market culture and attract liquidity going forward • The financial sector is probably one of the first sectors that can be subject of a wide and coordinated privatization program 1 2 3 4

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