Budimex's new management also shuns merger with Exbud
Budimex's management, both old and new, feels that the company is in too weak a position to talk about merging just yet. The company's main argument is that its shares are undervalued now, and that it would have to give up too much in any potential share swap with Exbud. Analysts, however, said the company's fears are irrational, particularly since the two construction firms have yet to even talk about how such a deal would be constructed.
"The most important thing for us is the interest of our shareholders," said Irena Jagielska, a spokesperson for Budimex, one of the largest construction companies on the Polish market. "Right now the shares of Budimex are undervalued."
Budimex's shares were trading Dec. 3 at a price-to-earnings (p/e) ratio of 10.3 on current earnings, while Exbud's shares were trading at a p/e of 17.6 on the same day - or about 70.8% higher. Exbud has a total market capitalization of zl. 396 million ($113 million), while Budimex's is zl. 256.6 million ($73 million).
Budimex's management is afraid that the discrepancy in valuation will force them to give up more control if the two companies merge. The company has said it wants to concentrate on tightening its business and increasing its esteem among investors before talking about teaming up with Exbud.
But Exbud executives said they do not understand why Budimex has determined that a merger is not possible when the two companies have not yet discussed anything in detail.
"It is too early to say that the operation would be disadvantageous for Budimex's shareholders," said Grzegorz Oberda, Exbud's spokesman. "The talks on the merger have never begun."
On Nov. 2, Exbud said it wanted to increase its stake in Budimex from 7.25% to 11.22%. The firm, however, holds only 8.14% of the voting rights while the largest shareholder, Kredyt Bank PBI has 24.3%. Other stockholders include emerging market fund Templeton (6.3%) and German firm Baupost (6.6%).
Jagielska said that because the management has just taken over - Marek Michalowski was only appointed at the beginning of November - it is unclear what Budimex's strategy will be. One thing Michalowski has said, however, is that he wants the company to concentrate more on its core business of construction and do away with less profitable operations.
"The company's operations are very diversified, including running hotels and stores, but over 90% of revenue comes from basic operations, which is construction," Jagielska said.
She said the company also plans to overhaul some of its personnel as part of its restructuring, but that a merger was nowhere in the picture.
But Exbud CEO Witold Zaraska said that the best way for both companies to improve their market position was to merge, so that they will have more weight and reach when competing with foreign firms. Exbud is also planning other mergers and acquisitions, and right now is negotiating with several construction companies, he said.
Combined, the two companies are expected to generate sales of roughly zl. 2.75 billion ($785 million) this year. In 1997, Exbud reported consolidated sales of zl. 1.22 billion ($370.3 million) and net profit of zl. 28 million ($8.5 million). Budimex reported sales of zl. 880 million ($267 million) and net profit of zl. 24 million ($7.3 million).
According to Exbud, sales could be much higher if the companies joined forces instead of competing against each other. This could make the merged company one of the 10 largest construction companies in Europe, Exbud said.
"Without Budimex we could enter the market for large projects that right now are taken up by large foreign companies," Exbud's Oberda said.
He also said that in a few years' time, the merged entity could bring in annual sales of up to $4 billion. That would enable the group to take on larger projects and still maintain its bread-and-butter business of medium-sized construction contracts, he said.
But analysts are not sure that a merger would bring those desired results. "We questioned the whole idea of this merger as it was not entirely clear why it should help to generate larger sales," said Artur Szeski, an analyst at CDM Pekao brokerage. "The argument about the possibility of lowering margins and management costs is not convincing."
Szeski also said he did not believe Budimex's shareholders would agree to a merger with Exbud. "Their control over the newly created company would be significantly lower," he said.
While Budimex is unwilling to talk merger right now, Jagielska said, it is interested in discussing areas in which the two companies can cooperate.
Oberda said that Exbud is willing to wait for Budimex to become more comfortable with the idea of merging. "As a large shareholder in Budimex, we do not want to act against it," Oberda said.
Szeski said that investors, however, had been disappointed that the two firms had abandoned merger talks. The shares of both companies jumped sharply over the last week of October during the height of the discussion. Exbud gained 24.5% to close at zl. 32 on Oct. 30, and Budimex rose 23.4% to close at zl. 17.9. In the month of November, Budimex's share price fell by 10.1% and Exbud dropped by 18.8%, while the WIG index only fell 8.7%.
"The most important thing for us is the interest of our shareholders," said Irena Jagielska, a spokesperson for Budimex, one of the largest construction companies on the Polish market. "Right now the shares of Budimex are undervalued."
Budimex's shares were trading Dec. 3 at a price-to-earnings (p/e) ratio of 10.3 on current earnings, while Exbud's shares were trading at a p/e of 17.6 on the same day - or about 70.8% higher. Exbud has a total market capitalization of zl. 396 million ($113 million), while Budimex's is zl. 256.6 million ($73 million).
Budimex's management is afraid that the discrepancy in valuation will force them to give up more control if the two companies merge. The company has said it wants to concentrate on tightening its business and increasing its esteem among investors before talking about teaming up with Exbud.
But Exbud executives said they do not understand why Budimex has determined that a merger is not possible when the two companies have not yet discussed anything in detail.
"It is too early to say that the operation would be disadvantageous for Budimex's shareholders," said Grzegorz Oberda, Exbud's spokesman. "The talks on the merger have never begun."
On Nov. 2, Exbud said it wanted to increase its stake in Budimex from 7.25% to 11.22%. The firm, however, holds only 8.14% of the voting rights while the largest shareholder, Kredyt Bank PBI has 24.3%. Other stockholders include emerging market fund Templeton (6.3%) and German firm Baupost (6.6%).
Jagielska said that because the management has just taken over - Marek Michalowski was only appointed at the beginning of November - it is unclear what Budimex's strategy will be. One thing Michalowski has said, however, is that he wants the company to concentrate more on its core business of construction and do away with less profitable operations.
"The company's operations are very diversified, including running hotels and stores, but over 90% of revenue comes from basic operations, which is construction," Jagielska said.
She said the company also plans to overhaul some of its personnel as part of its restructuring, but that a merger was nowhere in the picture.
But Exbud CEO Witold Zaraska said that the best way for both companies to improve their market position was to merge, so that they will have more weight and reach when competing with foreign firms. Exbud is also planning other mergers and acquisitions, and right now is negotiating with several construction companies, he said.
Combined, the two companies are expected to generate sales of roughly zl. 2.75 billion ($785 million) this year. In 1997, Exbud reported consolidated sales of zl. 1.22 billion ($370.3 million) and net profit of zl. 28 million ($8.5 million). Budimex reported sales of zl. 880 million ($267 million) and net profit of zl. 24 million ($7.3 million).
According to Exbud, sales could be much higher if the companies joined forces instead of competing against each other. This could make the merged company one of the 10 largest construction companies in Europe, Exbud said.
"Without Budimex we could enter the market for large projects that right now are taken up by large foreign companies," Exbud's Oberda said.
He also said that in a few years' time, the merged entity could bring in annual sales of up to $4 billion. That would enable the group to take on larger projects and still maintain its bread-and-butter business of medium-sized construction contracts, he said.
But analysts are not sure that a merger would bring those desired results. "We questioned the whole idea of this merger as it was not entirely clear why it should help to generate larger sales," said Artur Szeski, an analyst at CDM Pekao brokerage. "The argument about the possibility of lowering margins and management costs is not convincing."
Szeski also said he did not believe Budimex's shareholders would agree to a merger with Exbud. "Their control over the newly created company would be significantly lower," he said.
While Budimex is unwilling to talk merger right now, Jagielska said, it is interested in discussing areas in which the two companies can cooperate.
Oberda said that Exbud is willing to wait for Budimex to become more comfortable with the idea of merging. "As a large shareholder in Budimex, we do not want to act against it," Oberda said.
Szeski said that investors, however, had been disappointed that the two firms had abandoned merger talks. The shares of both companies jumped sharply over the last week of October during the height of the discussion. Exbud gained 24.5% to close at zl. 32 on Oct. 30, and Budimex rose 23.4% to close at zl. 17.9. In the month of November, Budimex's share price fell by 10.1% and Exbud dropped by 18.8%, while the WIG index only fell 8.7%.
