BIG-Eureko chosen for PZU negotiations, but victory could be draining for suitor
A consortium of BIG Bank Gdanski (BIG BG) and Eureko was chosen last week to enter into exclusive negotiations for a 30% strategic stake in state-owned insurer Powszechny Zaklad Ubezpieczen (PZU).
The announcement knocked the other short-listed bidder, French insurer Axa, out of the deal. But analysts warned that winning PZU could turn out to be a Pyrrhic victory for BIG BG and Eureko, bleeding the victors while not necessarily adding value to the country's largest insurer.
The reason, analysts added, was that the deal now seems to be more about concluding the battle for control of BIG BG, by strengthening cross-shareholding ties with PZU, than restructuring the insurer.
"This is just another quasi-privatization," said Marek Juras, an analyst with Erste Securities Polska.
The government will see a hefty inflow of privatization revenue from the sale, but this will not improve PZU's situation, he added.
The deal will, however, change PZU's status within BIG BG from that of an uncommitted shareholder to that of a strong ally.
Currently PZU holds 6.81% of BIG's shares and this package will bring the contribution of "BIG-friendly shareholders" to a total of 52.24%. The challenger in the recent battle for BIG BG, Deutsche Bank, even with permission to increase its stake to 25% from its current 9.9% stake, will stand no chance against a shareholding coalition including PZU, analysts said.
By owning a large chunk of PZU, BIG BG in turn will see to it that the insurer stays within its group of friendly shareholders.
At the same time, the winning consortium will need to cough up about $750 million, if it sticks to its reported valuation of PZU at zl. 9 billion-zl. 11 billion ($2.25 billion-$2.75 billion). For BIG BG, this means coming up with about $250 million.
"The purchase will be financed by our own means and by a subordinated loan," said Wojciech Kaczorowski, public relations director at BIG BG. He would not disclose the amount being considered for the subordinated loan.
The subordinated loan will be necessary because an investment into a financial institution is not included in assets for purposes of calculating the bank's solvency ratio, which is own capital compared to risk-weighted assets. Either way, the deal will dent BIG's solvency ratio. But if the bank were to come up with the payment from its own funds, BIG BG's solvency ratio would fall to 5%, well below the 8% safety level set by the National Bank of Poland (NBP), Juras said. With the subordinated loan, the bank's current solvency ratio of 15.1% would fall to 10.2%, he added.
"It would be the lowest ratio in BIG BG's history," Juras said. "But still within the safety limits." And since only half the amount of the subordinated loan can be included in bank's own capital, BIG BG would need $500 million.
Analysts pointed out that Eureko could emerge as the lender for the subordinated loan. However, the Dutch-based grouping of European insurers may itself be strapped to come up with funds to pay for its 20% portion of PZU.
This in part explains a recent capital increase at Eureko. "But the increase was not only for the purchase of PZU," said Lorri Morgan, a communications officer at Eureko. "That's for our investment in Europe." Morgan refused to reveal the amount of the capital increase.
The fact that the BIG-Eureko consortium will have to scrape together cash for PZU also led analysts to question the rationale behind this privatization partner. Axa, they added, would have no such financial questions. "Even if Eureko doubled its capital, it's still no match for Axa, with ECU 13.5 billion in own capital," said Karlos van Endert, an insurance analyst with Commerzbank in London. Eureko at the end of 1998 had ECU 767 million in own capital.
Van Endert believed the government favored BIG and Eureko because of the involvement of a local player.
This could be a mistake, he added, because Axa has a track record of successfully restructuring other insurance companies and is far more liquid.
Last year Eureko lost out in the bidding for French insurer GAN, and this year for British insurer Guardian Royal Exchange (GRE), which was bought by Axa in February. The Eureko alliance is jointly owned by Dutch insurer Achmea, U.K.'s Friends Provident, Parion of Germany, Sweden's LF/Wasa, Topdanmark of Denmark, Banco Commercial Portugues and Swiss Mobiliar Insurance.
