For the offering to be possible to close, investors should have bought at least EUR390 million worth of shares, that is 80% of the total number of shares put up for sale (5.57 billion), at a minimum price of 0.3708 lei/share. It did not happen, despite the positive perception of Romania lately, driven by the rating upgrade by Fitch and investor interest in the eurobond issue last month.
Petrom is Romania’s largest company and one of the most profitable, has an extremely high brand awareness in the country, which could have stirred interest among local investors and operates in a very attractive industry at the moment, the oil sector. The limited supply of crude reserves worldwide and the significant rise in the oil price make Petrom, a company with significant reserves, an attractive investment. Under the circumstances, the failure of the offering is hard to explain even for those in the same industry.
“I am surprised by this result,” says Constantin Tampiza, former general manager of Lukoil Romania and currently the local representative of the chairman of the Russian group, Vagit Alekperov. “(…) It is a surprise, especially that now when we are surrounded by all this instability, one should seek to put one’s cash in a safe place and energy is a stable business. (…) I think maybe the unfavorable circumstances and the uncertainty surrounding the royalties Petrom will pay as of 2014 came into play here.”
Those who are part of the market say the result is not that surprising and there are a number of causes leading to the failure, which may have negative effects on the local capital market and on the continuation of the Government’s privatization program.
Many experts on the market believe the brokers should be the first to blame for the failure of the offering. Russian investment bank Renaissance Capital, run by New Zealander Steven Jennings, along with local brokerage firms BT Securities, EFG Eurobank Securities and Romcapital, won the mandate to broker Petrom’s offering, after having offered the lowest fee of all bidders. Many competitors reacted at the time saying the lowest fee does not always guarantee the best results. The Russians, unknown in Romania until that time beat big Wall Street names like Goldman Sachs and Morgan Stanley.
Three factors led to the failure of the offering: its timing (it was set to unfold during vacation season), the insufficiently known broker on the London market and the price for the small investors that was not low enough, believes a bank analyst, who would not be named. “First, the timing was bad – the vacation season along with the negative international environment. Many initial public offerings in various countries were postponed,” the analyst said. ” Then it turned out the broker chosen (Russian investment bank Renaissance Capital, i.e.) was weak. It has no standing in London; you need a very large bank, a top bank for such a significant offer.”
Some brokers share his opinion. “The lack of advertising, the lack of political class involvement in the domestic promotion of the offering, the non-transparent price formation mechanism, all these led to failure,” said Broker Cluj’s general manager Grigore Chis. “The government should learn from this experience that the lowest fee is not the criterion to select a broker, but its capability and experience in such things, as well as the minimum price guarantee by that particular consortium.”
“They were hired to do a job and they didn’t do it. Everyone can find explanations as to why it didn’t end in success,” says Razvan Pasol, Intercapital Invest chairman. “This is a big failure of the consortium that brokered the offering and of the market. I for one thought the price was reasonable seeing it from a distance. It wasn’t the retail chunk that was the problem, because institutional investors were the ones that mattered and they should have been persuaded for the offering to end in success.”
The representatives of the consortium that brokered the offering say the main factor that led to failure was the international market context. “The difficult conditions on the international markets and their worsening during Petrom’s offering marketing made closing the deal extremely difficult. Under the circumstances, the risk appetite of investors, especially on capital markets they are not familiar with, is rather limited,” explained John Porter, managing director head of Financing Group with Renaissance Capital.
Various analysts believe the difficult market conditions cannot be used as an excuse, because they had been known from the start. As such, the problem lies with the strategy. “(…) it was a matter of strategy: when you have such conditions, you do not go ahead, you wait for the conditions to change. The government had a paid consultant and it was the consultant’s job to recommend an approach taking the circumstances into account (…),” believes Claudiu Cercel, executive vice-president for financial markets of BRD-SocGen.
Rares Nilas, general manager of BT Securities, part of the consortium, believes the failure was caused by the unstable context on foreign markets, which led to the failure of two public offerings in Poland and the postponement of the offering of the Russians at Alro. He says the offering could not have been postponed because “the government committed to a schedule to the IMF (International Monetary Fund) and wanted to stick to it.”
Ioana Tanase, general manager of EFG Eurobank Securities, says
the method proposed by the broker and chosen by the Government to
sell the stake is used everywhere else in the world and is not a
cause for failure.
Local investment bankers agree with the brokerage consortium and
say no other broker could have got a different result considering
the circumstances and that the government is the main culprit here
for having set an unrealistically high price.
“The high price at which the offering was conducted was the main reason for the failure, and the government is to blame here. No one could have worked wonders at such an offering price,” believes Doru Lionachescu, managing partner of Capital Partners boutique investment bank. “I don’t think the government really wanted to sell the 10% in Petrom, considering it announced a maximum price too high above the market price, while every investor expected a discount. (…)”
“The Romanian government decided to sell Petrom shares at a price investors were not willing to buy,” believes Matei Paun, owner of BAC Investment consultancy. “Demand did not meet supply, and I don’t think it was the offering brokers’ fault (…)”
Brokers believe a minimum price of RON0.32-RON0.34 per share would have made it more likely for the offering to end in success. This would have meant for the state to agree to take less for the 9.84% stake, i.e. EUR430 million instead of EUR485 million, which is hard to accept by Prime Minister Emil Boc, who said in April he would not sell the stake for any less than EUR600 million, the amount collected by the Nastase Cabinet for the privatization of Petrom. Prime Minister Emil Boc said Friday that Romania “isn’t desperate” to sell its shares in Petrom at just any price.