The big deals that didn't go through in 2005, and why
Wednesday, December 21, 2005, 13:21
The sale of Budapest Airport Rt to the U.K.'s BAA International is easily the largest of this year's Deals of the Year, weighing in at Ft 464 billion (€1.815 billion). Closure of the deal by the end of 2005 is now extremely likely, though for many months, it looked like it was never going to happen, owing to a catalog of errors and mishaps along the way.
There have been several other mega-deals in 2005 that, for various reasons, were not so lucky, however: The on-off privatization of the national air carrier, Malév Rt; the sale of Keler Rt, the central clearing house and depository, to the Budapest Stock Exchange Rt (BÉT); and the stymied acquisitions of blue chips OTP Bank Rt and Mol Rt in Southern and Central Europe.
We take a look here at why these deals failed to materialize, and examine the prospects for their completion in 2006.
Still up in the air
Following the conclusion of the lengthy privatization process of Budapest Airport at the end of December, Finance Minister János Veres and the State Privatization and Holding Rt (ÁPV) promised that Hungary?s national airline would be next on the block.
While Budapest Airport fetched an outstandingly high price, potential suitors for Malév have been turned down several times. Even when the deal has seemed closed, some unexpected obstacle or other has thwarted it.
The latest tender was cancelled in August by the ÁPV - for what it says were "business, professional and employment considerations" - after two serious bidders had made offers. There is currently no open tender, though the privatization body said it is willing to examine any potential offer, which, if found satisfactory, might lead to the calling of a new tender. As ÁPV CEO Márton Vági said in September, if a potential buyer turns up with a good offer, the sale should not be delayed.
In the meantime, the Hungarian-owned Aviation Solution Investment Consortium Kft (ASBK), which submitted the second best bid and hoped to get into the final round, has sued the ÁPV for violating the privatization process.
AirBridge, a consortium of Hungarian investors and Boris Abramovich, the head of Russian airline KrasAir, made the best offer of Ft 1 billion for the airline, together with the promise of injecting a further Ft 4 billion and restructuring Malév's state loans into commercial loans. As Malév has liabilities of Ft 36 billion, including Ft 32 billion with state guarantees, this means AirBridge was ready to spend over Ft 40 billion on the airline. In spite of this, the ÁPV claimed: "Following very thorough evaluation, the board of directors decided that acceptance of any bids would not fully serve the complex privatization objectives."
Even after the cancellation of the sale, both potential buyers are still interested in Malév; AirBridge representatives have stated that if the ÁPV calls a new tender, the consortium will definitely be among the bidders, while ASBK head Ferenc Kovács claimed that regardless of whether the ÁPV invites bids again, his consortium will submit a new offer to the privatization agency.
Spanner in the works
It came as a huge surprise to market participants two weeks ago that after government approval, months of preparation, and the selection of corporate finance advisor PricewaterhouseCoopers, MPs of all parliamentary parties - the Socialists, Free Democrats, Fidesz and MDF - halted the privatization of Keler.
The MPs put forward a proposal - later approved with a vast majority - that modifies the text of the new Securities Market Act in such a way that after splitting the clearing house and depository functions of Keler into two companies, the 50% majority stake of the depository firm will have to remain in government hands.
This means that the Budapest Stock Exchange, which has already acquired the Budapest Commodities Exchange (BÁT), cannot buy a majority stake in Keler. This works directly against the wishes of the BÉT's Austrian owners, who planned to make an integrated stock exchange, clearing house and depository firm, and to introduce shares of the integrated company on the BÉT itself.
It was decided earlier that the two activities of Keler would be separated into two companies in order to meet European Central Bank (ECB) regulations. A source close to Keler said this could happen in two ways.
First, the two activities could be allocated to two separate legal entities, in order to meet the ECB's demand that clearing risks are separated from risk-free depository house activity. In this case, the physical infrastructure - especially expensive IT systems - could continue to serve both operations, as was the plan before the legal modification to the Securities Act. The other, much more expensive alternative would be to physically separate the two companies, probably with different owners, the source said.
However, neither the National Bank of Hungary (MNB) nor the Finance Ministry is taking responsibility for the decision, according to sources speaking to the BBJ on condition of anonymity, who observed that it is unlikely MPs of the governing Socialist Party, or the opposition Fidesz and MDF, each came up with the idea of blocking the deal independently. According to one local business daily, the more likely scenario is that the initiative came from the ministry, and that the MNB had no major objections.
For their part, sources close to the MNB told the BBJ that the central bank was not even consulted on the matter in advance, let alone asked for its approval.
On the other hand, two more sources, again requesting anonymity, told the BBJ that the Finance Ministry's perceived reasons for halting the sale make little sense. Two arguments - first, that the Austrian owners of the stock exchange might gain access to information that would allow them to influence equity trades; and second, that a private owner might harm the protection of personal data - are unfounded, the sources said, as there are already several clearing houses and depositories in private hands in several countries. The public authority functions of the depository house can also be protected through legislative measures, and do not require government ownership in the depository firm, added one individual.
This was not the first time the privatization of Keler has been halted. Two years ago, financial investor Tamás Leisztinger purchased shares in both the BÉT and BÁT in the knowledge that these firms owned a significant stake in Keler. As reported at the time, there is allegedly a large amount of cash in Keler that is not necessary for the daily operation of the company, and which the owner can take out of the firm.
The plan did not come to fruition because the MNB - as a Keler shareholder - exercised its preemptive right to purchase 66% of the shares owned by the BÁT at that time. Market rumors, as reported in Világgazdaság, suggest that the Fidesz-leaning MNB President Zsigmond Járai wanted to stop Socialist-leaning Leisztinger from making a profit on the deal.
Last year's number one deal in our list was the sale of Mol?s gas business to Germany's E.ON AG. Twelve months on, and the deal is still not finalized, having been held up by EU regulators investigating whether it could lead to the creation of a monopoly.
As the BBJ went to press, it appeared that the deal will finally be put to bed - with EU approval now just a matter of time. Nevertheless, it has proven a risk factor for Mol's stock price all year.
That aside, Mol has seen other deals scuppered in 2005, through no real fault of its own.
The purchase of a controlling stake in Croatia's INA dd, in which Mol currently holds 25%, has been put back by the Croatian privatization authority to next year at the very earliest; second, Mol and INA's attempt to purchase a majority stake in Bosnian fuel distributor Energopetrol was only agreed upon in principle last week, despite an initial agreement having been reached in April 2005.
Mol bought into INA in July 2003, winning a tender for 25% plus one share, in Croatia's largest privatization deal to date. Kornél Sarkadi Szabó, analyst at Raiffeisen Bank Rt, explained that although it does have some upstream operations, including oil and gas fields in Croatia and exploration overseas, INA is mainly a refining and retail concern, hence the attractiveness for Mol. It operates 397 gas stations in Croatia and 36 in Bosnia, and has over 60% of the retail market in Croatia, he noted.
In terms of INA's contribution to Mol's performance, Sarkadi Szabó said INA currently delivers around 5% of the group's pre-tax profit. He added that there is little doubt that Mol will become the controlling owner of INA, though it is likely to be 2007 before the transaction is fully completed.
Regarding Energopetrol, the deal fell apart in September when Mol rejected the Bosnian government's proposal that the buyer take on debts and back taxes owed by the company. However, according to reports from newswire MTI, this hurdle was cleared last week after a Sarajevo court rejected the government claim for €11.3 million in back taxes.
Mol is keeping its earlier bid for a 67% stake in the company, Napi Gazdasag reported; an initial bid of €112.2 million, plus a plan to spend €77 million in the next three years. Analysts thus expect the deal to be completed sometime in the new year.
For its part, OTP Bank, by far Hungary's largest retail bank, has seen its path to further expansion increasingly lie in the surrounding region in recent years. The bank has acquired retail operations in Slovakia, Croatia and Bulgaria, and - with the 2004 acquisition of RoBank SA - Romania. Stated future targets include Serbia-Montenegro and Ukraine, as well as further moves into Romania. Indeed, according to OTP's vision for the next four years, the group is "building a regional franchise through acquisition."
In spite of being linked with a host of regional banks in 2005, however, OTP has thus far emerged empty-handed.
Currently, the bank has a bid in for Romania's fourth largest bank, Casa de Economii si Consemnatiuni SA (CEC). Other irons in the fire include Vojvodjanska banka a.d. in Novi Sad, Serbia, and the recent announcement that it will pursue another Serbian lender, Panonska banka a.d. In addition, OTP has submitted a binding bid to purchase an 89.39% stake in a small Serbian lender, Niska banka a.d.
It is expected that at least one of these deals will be completed next year.