Investment banks hold out for upturn in economy
By : Greg Goodale
Privatizations such as PKN Orlens are still attracting major investment players.
Investment banks in Poland are feeling the slowdown on the Warsaw Stock Exchange (WSE) through fewer contracts and a thinner presence of global companies on the Polish market. The best established firms are holding out, hoping that a recovery will bring greater mergers and acquisitions activity.
Complex privatization deals like the sale of oil concern Nafta Polska's 17.6% stake in refinery and petroleum retail group Polski Koncern Naftowy Orlen (PKN Orlen) are the bread and butter of investment banks, which act as intermediaries between issuers of securities and the public. But the deal, creating Central Europe's largest cross-border oil industry alliance, is one of only a few that will see completion this year. With the government holding back the pace of its privatization program raising only 11.8% of its revenue target of zl. 2.13 billion ($507 million) in the first seven months of 2001 it has been a bleak year for the sector.
The drop in business and the general lack of interest in initial public offerings (IPOs) on the WSE, which has prompted the treasury's privatization fears, is also putting pressure on the investment banking sector, according to Wojciech Kostrzewa, chairman of BRE Bank. "We've seen a general movement of companies away from the trading floor, which hasn't helped our growth," Kostrzewa said. "Declining levels of trade on the Warsaw Stock Exchange will hit stock brokers the hardest."
But for Andrzej Sykulski, president of BNP Paribas Corporate Finance, the shortage of IPOs has meant a change in the type of work his bank undertakes. "The strongest element is our consultancy arm, or mergers and acquisitions, rather than share issues because of the slowdown on the capital market," Sykulski said. "Debt instruments are also an important part of our work in Poland."
This is in marked contrast to the mood on the market in 2000, said Marek Gul, president of Credit Suisse First Boston. "Last year we were in a situation where we could choose our mandates," Gul said. "Both sides of a transaction would want to hire us."
Lukasz Wierzbicki, an analyst at Raiffeisen Investment Poland, said it is difficult for investment banks to attract foreign investors to Poland because of the country's poor macroeconomic standing and low confidence in emerging markets. "Election time is always quite difficult for the stock exchange," Wierzbicki said. "There is also great concern about the budget for next year and the deficit." He added that this has been particularly evident in the IT sector and telecommunications.
This has led banks to change their tactics in Poland, with a significantly reduced presence compared to the mid-1990s. "Some foreign banks are either withdrawing from the Polish market or limiting their operations," Kostrzewa said.
According to Gul, the players who retain representative offices but are only interested in transactions over $1 billion will not be able to compete. "If you get into a market whose specifics you don't know, without credentials, it is very difficult to get these jobs," Gul said. "You have to do smaller transactions."
But with confident predictions about the shape of the future government, Sykulski said September's general election is not a major source of concern for investment bankers. "The main part of the reforms will be continued," Sykulski said. "SLD will support Poland's access to the EU, and Poland will have to follow a strict agenda to take charge of the budget deficit, reduce inflation and promote the growth of Poland's GDP."
The larger number of acquisitions resulting from lower prices on the WSE is also helping compensate the shortfalls on the market. "In previous years there was basically an acquisition mood, now it's a consolidation mood; a lot of mergers," Gul said. "There are big transactions. Average mergers and acquisitions transactions are between $15 million and $20 million. But every year you have five or six transaction of a few hundred million dollars and at least one or two over $1 billion."
For Kostrzewa, the remaining privatization potential in Poland and the increasing complexity of transactions such as that between oil giant PKN Orlen and Austria's OMV or Hungary's MOL make it an attractive market for established players, despite the current gloom. "The Polish economy is founded on treasury-owned companies that will continue to consolidate and seek out capital for further growth," Kostrzewa said. "Clients will look for the support of advisers and investment banks, especially since the market is becoming more demanding in these areas."
