BRE's bold investment strategy may backfire

BRE Bank has built a name as an aggressive and largely successful equity investor but troubles with its recent Elektrim venture have torpedoed its shares and threaten to damage its reputation. BRE, a corporate bank that has made inroads into profitable Internet retail banking, has repeatedly sweetened its bottom line with investments more typical of venture funds, with CEO Wojciech Kostrzewa turning many critics into admirers. But BRE's shares sank 7.3% this week and nearly 20% since early March on market fears that the Commerzbank-controlled lender may have overplayed its hand investing in power-to-telecoms group Elektrim.

"The biggest deals in Polish investment banking by a local player have been done by BRE," said Artur Szeski, a banking analyst at Pekao brokers in Warsaw. "For two or three years now, no other bank has been involved in this kind of operation. "But it will be hard for BRE to get back half of what it invested in Elektrim. That's the best-case scenario," he added. Analysts initially praised BRE's estimated $30 million equity investment in collapsing conglomerate Elektrim, which was to help the bank get hold of Elektrim's prized telecoms assets at a bargain price. But Elektrim, now controlled by BRE and fellow shareholder French-American Vivendi Universal, failed to strike a restructuring deal with bondholders this week, raising fears that the group will go into bankruptcy - which would hand control over the firm's assets to a court administrator.

Going once, going twice That could force BRE, a medium-sized Polish bank with a market cap of nearly $700 million, into a bidding war for the telecoms assets. A rival bidder, linked to holders of Elektrim's defaulted debts, has already asked for an independent body to evaluate the offers, given the bank's strong links to Elektrim's newly installed management. Analysts estimate BRE has already dished out a quarter of its forecast 2002 net profit to build up its 17.5% stake in Elektrim, whose shares sank to nine-year lows this week. The bank will have to spend at least O50 million more to win Elektrim's 49% stake in a telecoms holding which controls Eastern Europe's top mobile firm Polska Telefonia Cyfrowa (PTC). Kostrzewa told daily newspaper Parkiet last week that BRE's estimates of Elektrim's liquidation value allowed him to "feel comfortable" despite the recent fall in Elektrim's valuation but analysts said that for BRE to make money on the deal European telecoms valuations must recover first.

"I don't regret the decision to go into Elektrim," he said. Analysts perceive Kostrzewa as a suave gambler and believe that, more than for any of his peers, the institution he runs has taken on his personality. "You have to be a gambler to be involved in investment banking, and definitely he's more of a gambler than any other Polish bank chairman," said Szeski. "As to whether that's positive or negative - well, the market's perception of such people depends on how successful they are." That success may become clearer in mid-May, when the bank releases first-quarter results, which analysts say could include provisions for unrealized losses on Elektrim shares.

Track record BRE has built its reputation as an aggressive investor on deals like its 1999 sale of a stake in PTC to Elektrim - then an up-and-coming telecoms player - through which the bank made an estimated zł. 500 million ($125 million). But not all the deals have been so lucrative. Analysts cite BRE's failed attempt in 1999 to merge with Bank Handlowy, which was eventually bought by Citigroup, and its 2000 purchase of a 5% stake in alternative fixed-line operator Netia, which recently was forced to swap equity for debt to avoid bankruptcy.

In another transaction that was seen as groundbreaking on Polish capital markets, BRE bought a controlling stake in computer maker Optimus in 2000, and sold it in 2001 to ITI Group, a Luxembourg-listed media company, for bonds convertible into ITI shares after the company's planned Warsaw listing. But BRE has yet to realize a profit on the deal - the first to take advantage of a regulation allowing de-mergers - and was forced to cut its 2001 net profit forecast by 20% after ITI postponed its Warsaw flotation, now due later in 2002. - Reuters