Gas Utility For Sale 10 Years After Privatisation

The weekend edition of daily Pravda contained an article on whether the sale of Slovak gas utility was a good one or not, as the French and German foreign investors now look to sell off their stake after ten years. Here The Daily provides you with a free translation of the article.

Quick money from privatization, SPP is up for sale again

(Pravda, 4 February 2012, by Martin Kováčik, Michal Holeš)

The impressions that the first Mikulas Dzurinda government privatized Slovenský plynárenský priemysel in 2002 below price, have been confirmed after a decade.
The foreign investors privatising the company are now offering their 49% stake up for sale again. They have almost already received back the amount of SKK 120.9 billion, which the government sold the shares for in 2002 shortly before the general elections, thanks to the high profits and dividends of the gas utility. The profits of SPP have grown together with rising gas prices and revitalization of the company.
”A return in the range of ten years is very quick. The state could probably have requested a higher price in the sale. An ideal period of return with similar investments is around twenty years”, says analyst with Next Finance, Martin Prokop.

The Dzurinda government sold the gas company, even though there was only one bid in the tender and the estimates of renowned companies stated that the 49% package of shares in the biggest Slovak company had a higher value, or around SKK 121 to 193 billion.Head of the privatization commission was current minister of finance Ivan Mikloš (SDKÚ). He claims that the foreign shareholders had raised the profits of the company, from which the state as a 51% shareholder also profited. “For the same period the revenues of the state in connection with SPP almost doubled. Not to mention the fact that it is unreal to assume that the state would have collected the same dividends if remaining the sole owner of SPP”, said Mikloš by way of his spokesman  Martin Jaroš.

The profits of SPP and the dividends after privatization increased after the company greatly reduced employment levels and gas prices increased sharply. The gas company also stopped being associated with scandals with overpriced tenders and the pouring of money to selected companies close to political parties. The return for the investors was helped on also by payment of an extraordinary dividend from the reappraisal of assets worth several hundred million euros. In terms of gas prices, during the two governments of Mikuláš Dzurinda in 1999 to 2006 alone the price of gas for heating homes increased by around 600 percent.

Before the gas company was privatized, the loss-making gas prices were subsidized from profits from gas transit to the west. The cross-subsidies were cancelled following entry to the EU at the order of Brussels. Ensuring that gas prices contained one hundred percent of all costs was one of the conditions made by German Ruhrgas (now E. ON Ruhrgas) and Gaz de France (now GDF Suez) when entering the gas company. Nevertheless, for years SPP has been battling with the regulatory authority over prices, and it is this, alongside the threat of economic recession, that is said to be one of the reasons why the investors now wish to leave the company.

The company Energetický a průmyslový holding, controlled by billionaire Daniel Křetínsky and the financial group J&T, is a prospect for the share. Right of first refusal falls to the state, and it has a say about the deal. Economy minister Juraj Miškov (SaS) is trying to sell off the shares as soon as possible, and had conflict with recalled head of privatization agency FNM Anna Bubeníkova over the issue. Due diligence is being carried out at SPP at present, but completing the deal before the March elections is not counted with. According to the analyst, not only did SPP get a quick return of the money put in by the investors to enter SPP, but the shares can now be sold much more profitably than for what they acquired them. “Now the investors can demand a much higher price that they paid for the shares back in 2002. The price is also supported by the fact that the energy sector isn’t among the most cyclic of sectors. It deals with a commodity of an essential nature. In addition to profit from dividends, the investors should also cash in substantial capital gain” underlines Prokop.

He points out also that with a 10-year return the dividend yield to the purchase price would reach around ten percent. “This depends on the parameters of the initial appraisal. Firstly, the appraisal model did not count with such a strong growth in revenues and profit”, adds Prokop.

According to another analyst, though, when looking at the issue of return from privatization it is important also to look at the circumstances in place upon the sale in 2002. “From the perspective of return on investment, it is not a transaction that would stick out of the acquisition standards in terms of sector and volume at the time”, says investment manager of Slavia Capital Peter Kušnír. According to head of the Economic policy institute, František Palko, the purchase of SPP was an interesting investment for the investors. “The fact that they remained and paid out dividends corresponds to their idea”, Palko adds.

Since 2002 the foreign investors have progressively paid out around EUR 3.6 billion (SKK 107 billion) in dividends from the profits of SPP, which is an average of EUR 395 million (SKK 11.9 billion) for one a year. From this perspective, this year they will have got back the money for the purchase of the share via dividends, ten years after privatisation.
Ten years since privatization of Slovensky plynárensky priemysel

– Ruhrgas and GdF gave the government SKK 120.9 billion for 49 % of shares in SPP in 2002

Low privatization price?
– In 2001 renowned institutions estimated the value of the 49 % of shares in SPP at USD 2.5 to 4 billion (SKK 121 – 193 billion)

– This year the investors will probably have gotten back the actual amount of SKK 120.9 billion paid for the shares in SPP by way of dividends from the gas company – 10 years after privatisation

– According to an analyst, a return of ten years is too quick and indicates that the shares were sold below price

– Another analyst regards the return as reasonable considering the fact that only one offer to buy the shares was received in 2002

– The privatizing entities put the company through reforms, without which the profits and dividends would be lower

– SPP paid out also extraordinary dividends, though, which were not spoken about in the privatisation.

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