Out of the loop
By : Alexander Stocks
The new century is proving to be a testing time for Europe's stock exchanges. With mergers and possible hostile takeovers on the lips of traders around the continent, some analysts are beginning to doubt the long-term success of the young exchanges of Central Europe.
The Warsaw Stock Exchange (WSE) is the region's most successful, with an equity market capitalization of nearly $37 million. But with recent changes among the continent's trading systems, it could be relegated to a secondary market within a few years, playing second fiddle to one of the emerging European stock-exchange alliances.
Many analysts are already predicting that companies will leave the exchange in increasing numbers as strategic investors delist Polish acquisitions, threatening the WSE's liquidity and credibility. With average turnovers per session of $92 million, the WSE is still considered a fairly liquid exchange. Thanks to a tight regulatory framework, it's also a transparent market that has earned the respect and confidence of investors throughout Europe. But things change.
Piotr Kazimierski, co-head of equity sales at SG Securities, said delisting has become a growing trend among companies during the past few years. To date, the list isn't huge, but it includes a handful of notable Polish companies. One of the first to be scratched from the WSE was chocolate producer E. Wedel.
Selling off the family chocolate
The company, named after Emil Wedel, the firm's 19th century founder, has long been a favorite among Poles for its chocolates, confections and snack foods. In 1991, PepsiCo acquired an equity interest in Wedel, which was later increased to 99.5%. In February 1998, shareholders approved a management decision to delist the company. During that same year, PepsiCo sold Wedel's chocolate operations to Cadbury for $76.5 million and its biscuit factory to Danone for $80 million. PepsiCo held onto Wedel's salty snacks division and incorporated it into its Frito-Lay subsidiary.
Cadbury Wedel currently claims 21.3% of the confections market in Poland and 32% of the chocolate-bar market, according to Agnieszka Surowicz, the firm's public relations manager.
Wedel's parent, Cadbury Schweppes, itself would have delisted the company, Surowicz said, as it follows a company policy of delisting subsidiaries.
"It makes no sense to have both companies listed in two countries," she said, mentioning that Cadbury Schweppes trades on the London Stock Exchange.
Analysts said the same reasoning would be behind the possible intention of Sweden's Skanska construction firm to delist its Polish subsidiary, Exbud. "I can't say it's groundless, but it's not us saying that," said Grzegorz Oberda, Exbud's communications director. "We Skanska never made any statements."
Oberda agreed, however, that "sooner or later" Exbud will delist for a number of reasons. He said that as a listed company, "we are standing naked in front of the competition."
Listed companies must notify investors any time an event or decision in the company is likely to have an effect on stock price. In addition, other company specifics must be made public on a quarterly basis: earnings and sales reports, balance and loss reports, and cash flow statements, to name a few.
"You give (the competition) everything they need," Oberda said. At this point, he said, the advantages of staying public on the WSE are heavily outweighed by the disadvantages of having Exbud's financial strengths and weaknesses scrutinized by competitors.
The money available through share issues such as the $45 million raised in early 1998 during a third consecutive capital increase is small change compared to the financing available through a multinational parent like Skanska.
In 1999, Skanska, which trades on the Stockholm Stock Exchange, reported $7.9 billion in net sales and $430 million in net profit while Exbud saw zl. 2.4 billion ($533 million) in net sales and zl. 16.2 million ($3.6 million) in net profit during the same period. Just last week, Exbud reported a zl. 66.3 million ($14.7 million) consolidated net loss for the first half of 2000.
On top of the competitive disadvantages of being listed, Exbud is no longer a liquid company for trading, as Skanska holds a 94% stake. "We have (already) taken advantage of the benefits (of being listed) to the greatest extent possible," Oberda said.
But he admitted Exbud would never be where it is today without the WSE. It was one of the first five companies to list when the exchange opened in early 1991 and the promotional and publicity effects of early entry were tremendous for at least six months, he said.
Also, "being a listed company, we were very credible to foreign financial institutions," Oberda said. As the company's shareholder base expanded and share prices increased, so did its ability to finance projects. Aside from shares sold on the WSE, Exbud has at various times issued global depository receipts (GDRs) on the Frankfurt, Berlin, London and Luxembourg exchanges, Oberda said.
Looking at GDR alternatives
Along with delisting, analysts said GDRs and American Depository Receipts (ADRs) may pose a threat to the market's liquidity.
GDRs allow investors to buy receipts for shares listed on foreign exchanges without having to purchase them from their home markets. Currently, 16 of Poland's most liquid companies trade as GDRs. Netia and Softbank, for example, issue GDRs on the Austrian-based Newex exchange, which specializes in Central and Eastern European companies. Also, phone giant Telekomunikacja Polska (TPSA) issues GDRs on the London, Frankfurt, Berlin, Stuttgart and Montreal exchanges, while media group Agora trades on the first four and BIG Bank Gdanski on the London and Berlin ones, according to Polish daily Rzeczpospolita.
But analysts admit it's difficult to quantify whether the firms issuing GDRs are sucking life out of the WSE or not. "It is acceptable to have a majority (of shares) on the domestic market and a portion of the shares listed abroad as GDRs," said Maciej Dzierzanowski, an economist specializing in capital market development at the Gdansk Institute for Market Economics.
Who's who on delisting
Companies already delisted from the WSE include plywood and chip-board producer Grajewo, owned by Germany's Pleiderer Holzwerkstoffe, and cement producer Gorazdze, owned by Belgium's CBR. DomPlast, a plastics manufacturer, has also left the exchange, as has beer maker Brok, which is controlled by Holsten Brauerei. Recently, paint producer Polifarb Debica was delisted by its Sweden-based parent Alcro Beckers.
Companies rumored to be on the verge of going non-public include beer maker zywiec, owned by the Netherland's Heineken. Fortis Bank is reportedly also considering delisting its subsidiary Pierwszy Polsko-Amerykanski Bank (PPA Bank).
Tacitly acknowledging the increasing threat of delisting, WSE management has considered measures to grow its indices, which currently house 229 companies, and even discussed trying to attract foreign-based firms.
Dzierzanowski believes pension funds and small, growing companies yet to be listed will save the day. After pension fund reform, the obligatory private funds will provide the capital supply to attract continued interest in the funds. "They could provide the (necessary) liquidity to the domestic market," Dzierzanowski said.
He also said successful young companies could fuel growth, along with the continuing privatization of state-owned industries.
But managers at the Polish exchange will continue to keep a keen eye on who's trading and who isn't. They'll also be watching what happens further afield at Europe's volatile exchanges. The next few years could be crucial for the welfare of the WSE.
