Investment bankers smell blood in booming market
"Investment bankers are bloodthirsty beasts. They can rip a company to pieces and throw the scraps to the hungry crowd," said Krzysztof Lis, president of the Polish Institute of Directors, during a presentation for 'Agenda Warsaw City 2010,' a project to create the strongest capital market in Central and Eastern Europe.
It's probably difficult to conceive of a more graphic definition of investment banking, but, then again, it's probably even more difficult to find an industry better suited to take advantage of the country's changing economy in the next two years.
Lis said he "just wanted to stress the bestiality of these people."
Ask investment bankers about their trade and they just want to stress the growing number of business opportunities blooming on the horizon.
One could say they smell blood.
With the imminence of the cure-all European Union, the presence of foreign investors keen on securing greater stakes in Polish enterprises, and the expected build-out of underdeveloped infrastructure, the country's investment banking community is poised to roll out more equity, debt and M&A transactions than they have in the past two or three 'lean years.'
The investment banking twosome of Piotr Samojlik and Paweł Tamborski, general managers at CA IB Financial Advisers, are some of the most optimistic in Warsaw.
Among other reasons, Samojlik is expectant that many entrepreneurs who are still thriving today, and who have finally reached a critical mass, are seeking the next step for their development and "want to be on the Warsaw Stock Exchange."
The desire is there because these companies, he points out, have already tapped the debt markets, and entry on the bourse is the natural next phase for such developing enterprises.
And CA IB plans to take advantage of this by basing its prospective success in winning new deals on its past achievements. Despite the recent years of relative paucity, it listed Bank Austria Creditanstalt, making it the first foreign company listed on the WSE, and raised zł.156 million (E32.98 million) for IMPEL via an initial public offering.
Though these are not market-moving transactions, they have been making the local financial pages owing to the dearth of companies that have recently been able to draw investors to their offerings.
And it's the investors here that are key: without them bankers are nothing.
Piotr Chudzik, vice-president at Deutsche Bank Global Corporate Finance, rests part of his sanguinity on the fact that his phone is continuously ringing with foreign investors interested in Poland. He does not say what deals have resulted, but notes that this is a conspicuous difference from the past two years when the Deutsche Bank offices were comparatively silent. Other bankers note a similar surge in interest, even if it's just interest.
In the next two years, bankers will be scouting out a variety of deals. First there are the hefty, high-profile transactions, namely privatizations. In the past it was imprudent to count on privatizations - but there are signals that some privatization is possible by 2005.
The Treasury Ministry finally tapped an advisor, Credit Suisse First Boston, in consortium with BGŻ Brokerage House, for the privatization of the country's largest bank, PKO BP. The deal is likely to attract a broad range of national and international investors. Bankers and investors, especially the nation's investment-starved pension funds, have been salivating over this deal for some time, only to leave tails wagging with the Treasury pulling out of deal after deal.
Also, earlier this month, the WSE, which is seeking to be privatized itself, announced that 21 companies have applied to sell shares on the exchange, a dozen of them intending an IPO. What's more, according to WSE executives, two of the firms on the list are state-owned: PZU, Poland's largest insurer, and WSiP, a schoolbook publisher.
In terms of sectors, information technology and telecom companies are predicted to be very active.
"There are a number of transactions in which we are involved with telecom and IT," said CA IB's Samojlik. In the past the firm has worked with Prokom and Softbank, among others.
Furthermore, bankers are expected to benefit from telecom consolidation in both fixed-line and mobile segments. In the fixed-line sector, Netia has plans to be the industry's master consolidator as it attempts to form a powerful enough company to confront the giant TPSA. Though it is unlikely that Netia will snatch TPSA's majority market share, it has been very active, most recently with its purchase of El-Net from Elektrim. Companies such as Tel-Energo and Telefonia Dialog also fall into this fixed-line category.
By the same token, the mobile sector is already attracting heightened foreign investor interest with markets predicting that Deutsche Telekom will finally get majority control of Polska Telefonia Cyfrowa and that Vodafone will buy Polkomtel. But in the case of both deals, dispute-resolving decisions are at present in the hands of an indecisive crew of shareholders. Bankers wait patiently.
Add to this, says one banker, the improving prospects for debt and the country becomes the exciting investment banking market it was circa 1997, when bankers saw themselves as trailblazers placing landmark transactions that are now the most actively traded names on the WSE.
One banker at a leading Warsaw investment bank, who declined to be named, citing bank policy, expects the amount of loan and bond transactions to trend upward, owing to several factors. A key driver behind debt deals will be European Union structural funds, which require municipalities to finance a portion of projects - usually in transport infrastructure - through their own devices. Small- to medium-sized projects fall into this category, the banker points out.
Banks should begin competing for contracts at the end of the year when the banker anticipates that such opportunities will begin to emerge.
Also, behind the expected return of the debt capital markets is the recent decrease in bond prices, especially among local blue-chips, such as TPSA and PKN Orlen. The bonds are trading down 100-200 basis points. "They're close to loan prices," the source said. That factor usually pushes issuers to bonds, which provide for more flexible capital-raising structures to the benefit of companies.
Last year, bankers were active in the bond and loan markets but didn't place new offerings, rather their transactions represented refinancings and backstop agreements. LOT, KGHM, PGNiG and TPSA were all active in this area.
Larger EU-financed projects, in which the banks will be involved, include the A1 and A2 highways, and the government has been despicably sluggish in developing these roads to the serious detriment of the country's overall well-being. Investment bankers hope the urgency of these transactions and the need to finance them rather than pay out of nonexistent funds will decrease their time to market.
Most bankers are quick to admit that competition among investment banks will, as always, be fierce. This is already evidenced by the fact that banks' transaction and advisory fees for equity deals have dropped precipitously from two to three percent on some transactions to 25 basis points (a basis point is one one-hundredth of a percent). This is particularly the case with privatizations, such as that of PKO, in which investment banks seem willing to give up capital in return for the 'prestige' of completing often-frustrating, highly political transactions.
Deutsche Bank's Chudzik said that the nature of the competition is changing, too. In the past, big-time investment banking tenders would have 10-15 banks competing.
"Now you have about five," he notes.
The reason for the fall-off in the number of banks on deals is that many foreign investment houses departed the country several years ago, focusing less attention on the region because of a poor deal-making environment, and concentrating instead on core markets. Few expect that the increase in the number of deals in the coming year or so will boost the number of banks in the region. In this relationship-driven business, new entrants would likely be cold-shouldered.
This has not hampered competition, however, Chudzik says.
"Obviously, everyone's looking for the largest deals to work on," he explains. But he acknowledges that even the most high-ranking investment banks won't be able to win all the deals. Which means that medium-sized deals will have to do.
And this is where the IPO market comes in, says Marcin Materna, analyst at Bank Millennium.
"This is a very good environment for IPOs," he says, expecting that the fees from the transactions will make up the bulk of local brokerage house revenues. "In the past two years there have hardly been any IPOs," he notes. He cited the improving economy - most recently evidenced by improved GDP - as the most important factor for the better IPO market.
So as the market improves, more companies find their way to the WSE and state-owned enterprises find their way into private hands, there is much to suggest that the appetite of Warsaw's "bloodthirsty" investment banks could finally be sated. Beware.
It's probably difficult to conceive of a more graphic definition of investment banking, but, then again, it's probably even more difficult to find an industry better suited to take advantage of the country's changing economy in the next two years.
Lis said he "just wanted to stress the bestiality of these people."
Ask investment bankers about their trade and they just want to stress the growing number of business opportunities blooming on the horizon.
One could say they smell blood.
With the imminence of the cure-all European Union, the presence of foreign investors keen on securing greater stakes in Polish enterprises, and the expected build-out of underdeveloped infrastructure, the country's investment banking community is poised to roll out more equity, debt and M&A transactions than they have in the past two or three 'lean years.'
The investment banking twosome of Piotr Samojlik and Paweł Tamborski, general managers at CA IB Financial Advisers, are some of the most optimistic in Warsaw.
Among other reasons, Samojlik is expectant that many entrepreneurs who are still thriving today, and who have finally reached a critical mass, are seeking the next step for their development and "want to be on the Warsaw Stock Exchange."
The desire is there because these companies, he points out, have already tapped the debt markets, and entry on the bourse is the natural next phase for such developing enterprises.
And CA IB plans to take advantage of this by basing its prospective success in winning new deals on its past achievements. Despite the recent years of relative paucity, it listed Bank Austria Creditanstalt, making it the first foreign company listed on the WSE, and raised zł.156 million (E32.98 million) for IMPEL via an initial public offering.
Though these are not market-moving transactions, they have been making the local financial pages owing to the dearth of companies that have recently been able to draw investors to their offerings.
And it's the investors here that are key: without them bankers are nothing.
Piotr Chudzik, vice-president at Deutsche Bank Global Corporate Finance, rests part of his sanguinity on the fact that his phone is continuously ringing with foreign investors interested in Poland. He does not say what deals have resulted, but notes that this is a conspicuous difference from the past two years when the Deutsche Bank offices were comparatively silent. Other bankers note a similar surge in interest, even if it's just interest.
In the next two years, bankers will be scouting out a variety of deals. First there are the hefty, high-profile transactions, namely privatizations. In the past it was imprudent to count on privatizations - but there are signals that some privatization is possible by 2005.
The Treasury Ministry finally tapped an advisor, Credit Suisse First Boston, in consortium with BGŻ Brokerage House, for the privatization of the country's largest bank, PKO BP. The deal is likely to attract a broad range of national and international investors. Bankers and investors, especially the nation's investment-starved pension funds, have been salivating over this deal for some time, only to leave tails wagging with the Treasury pulling out of deal after deal.
Also, earlier this month, the WSE, which is seeking to be privatized itself, announced that 21 companies have applied to sell shares on the exchange, a dozen of them intending an IPO. What's more, according to WSE executives, two of the firms on the list are state-owned: PZU, Poland's largest insurer, and WSiP, a schoolbook publisher.
In terms of sectors, information technology and telecom companies are predicted to be very active.
"There are a number of transactions in which we are involved with telecom and IT," said CA IB's Samojlik. In the past the firm has worked with Prokom and Softbank, among others.
Furthermore, bankers are expected to benefit from telecom consolidation in both fixed-line and mobile segments. In the fixed-line sector, Netia has plans to be the industry's master consolidator as it attempts to form a powerful enough company to confront the giant TPSA. Though it is unlikely that Netia will snatch TPSA's majority market share, it has been very active, most recently with its purchase of El-Net from Elektrim. Companies such as Tel-Energo and Telefonia Dialog also fall into this fixed-line category.
By the same token, the mobile sector is already attracting heightened foreign investor interest with markets predicting that Deutsche Telekom will finally get majority control of Polska Telefonia Cyfrowa and that Vodafone will buy Polkomtel. But in the case of both deals, dispute-resolving decisions are at present in the hands of an indecisive crew of shareholders. Bankers wait patiently.
Add to this, says one banker, the improving prospects for debt and the country becomes the exciting investment banking market it was circa 1997, when bankers saw themselves as trailblazers placing landmark transactions that are now the most actively traded names on the WSE.
One banker at a leading Warsaw investment bank, who declined to be named, citing bank policy, expects the amount of loan and bond transactions to trend upward, owing to several factors. A key driver behind debt deals will be European Union structural funds, which require municipalities to finance a portion of projects - usually in transport infrastructure - through their own devices. Small- to medium-sized projects fall into this category, the banker points out.
Banks should begin competing for contracts at the end of the year when the banker anticipates that such opportunities will begin to emerge.
Also, behind the expected return of the debt capital markets is the recent decrease in bond prices, especially among local blue-chips, such as TPSA and PKN Orlen. The bonds are trading down 100-200 basis points. "They're close to loan prices," the source said. That factor usually pushes issuers to bonds, which provide for more flexible capital-raising structures to the benefit of companies.
Last year, bankers were active in the bond and loan markets but didn't place new offerings, rather their transactions represented refinancings and backstop agreements. LOT, KGHM, PGNiG and TPSA were all active in this area.
Larger EU-financed projects, in which the banks will be involved, include the A1 and A2 highways, and the government has been despicably sluggish in developing these roads to the serious detriment of the country's overall well-being. Investment bankers hope the urgency of these transactions and the need to finance them rather than pay out of nonexistent funds will decrease their time to market.
Most bankers are quick to admit that competition among investment banks will, as always, be fierce. This is already evidenced by the fact that banks' transaction and advisory fees for equity deals have dropped precipitously from two to three percent on some transactions to 25 basis points (a basis point is one one-hundredth of a percent). This is particularly the case with privatizations, such as that of PKO, in which investment banks seem willing to give up capital in return for the 'prestige' of completing often-frustrating, highly political transactions.
Deutsche Bank's Chudzik said that the nature of the competition is changing, too. In the past, big-time investment banking tenders would have 10-15 banks competing.
"Now you have about five," he notes.
The reason for the fall-off in the number of banks on deals is that many foreign investment houses departed the country several years ago, focusing less attention on the region because of a poor deal-making environment, and concentrating instead on core markets. Few expect that the increase in the number of deals in the coming year or so will boost the number of banks in the region. In this relationship-driven business, new entrants would likely be cold-shouldered.
This has not hampered competition, however, Chudzik says.
"Obviously, everyone's looking for the largest deals to work on," he explains. But he acknowledges that even the most high-ranking investment banks won't be able to win all the deals. Which means that medium-sized deals will have to do.
And this is where the IPO market comes in, says Marcin Materna, analyst at Bank Millennium.
"This is a very good environment for IPOs," he says, expecting that the fees from the transactions will make up the bulk of local brokerage house revenues. "In the past two years there have hardly been any IPOs," he notes. He cited the improving economy - most recently evidenced by improved GDP - as the most important factor for the better IPO market.
So as the market improves, more companies find their way to the WSE and state-owned enterprises find their way into private hands, there is much to suggest that the appetite of Warsaw's "bloodthirsty" investment banks could finally be sated. Beware.
