PKN plans big offering to pay for investments
Polski Koncern Naftowy (PKN) plans to raise zl. 1.03 billion-zl. 1.54 billion ($251.2 million-$375.6 million) through a public offering later this year to pay for acquisitions in the fuel sector, modernizing its existing operations and investments in telecoms and media, the Business Journal has learned.
"They will increase their shareholders' capital for sure and will use it to finance investments," said Piotr Wozniak, an analyst at CDM Pekao Securities. But at the moment "no one knows what the (specific) goals of the issue will be."
PKN plans to sell 42 million-63 million shares, which will expand its current free float by 10-15%. The offering will run concurrently with the Treasury Ministry's public sale of its 30% stake in the oil giant later this year, analysts said last week. The ministry already partially privatized PKN through an initial public offering (IPO) of 30% of the company at the end of last year while at the same time giving 15% to employees.
PKN press spokesman Ireneusz Wypych did not deny that the company will undergo the offering and said that more information may be available next week.
PKN is undergoing a zl. 7.3 billion ($1.78 billion) investment program that it hopes to complete by 2005. Based on last Thursday's closing share price of zl. 24.4 per share, PKN would raise zl. 1.03 billion-zl. 1.54 billion ($251.2 million-$375.6 million) from its share sale. At its closing price Thursday, PKN had a market capitalization of zl. 10.25 billion ($2.5 billion).
PKN is likely to spend a good portion of the new capital on modernizing its network to prepare for Poland's liberalization of its fuel market in 2001, Wozniak said.
In addition to those modernization plans, the company is also eyeing two acquisition targets, analysts said. One is Slovak oil firm Slovnaft, which PKN needs to buy to defend its southern borders from other Central European oil companies. The other is state-owned storage operator Naftobazy, Wozniak said.
PKN may also use the cash for media and telecom investment. One possibility is for the company to help launch a television venture called Polski Koncern Medialny. Others include increasing its 19.48% stake in mobile phone operator Polkomtel (Plus GSM) and investing in publicly traded securities, he said.
The sale of the Treasury Ministry's stake as well as PKN's share issue would mark the second and third time within a year that the company's shares have been offered on public markets. Rather than going for a bank loan or issuing bonds, PKN will float shares to combine the procedures and costs involved in both its and the Treasury Ministry's issue, Wozniak said.
PKN also wants to profit from investor interest in the oil sector. The company is the second-largest stock on the Warsaw Stock Exchange (WSE) and was 10 times oversubscribed in its IPO. While PKN's subscription price was zl. 19.5 per share, both PKN and the Treasury Ministry will be expecting around zl. 30 per share this time around, analysts said.
However, PKN's shareholders may not support the new issue. According to Polish regulations, 75-80% of PKN shareholders must back the capital increase, said Marek Wierzbowski, a securities lawyer at Weil, Gotshal & Manges.
Moreover, the Treasury Ministry may block the move to prevent its second offering in PKN from being overshadowed, said Michal Mierzwa, an analyst at COK Banku Handlowego. He said, however, the ministry's offer will be more attractive because it can give discounts to small individual investors. The Treasury Ministry is "interested in its own shares," he added.
PKN, which controls 30-40% of the retail gas market and 50-70% of the refining market, is anxious to remain the dominant oil and gas company in Poland. In that aim, the company had designs to acquire fuel transporter Dyrekcja Eksploatacji Cystern (DEC) and pipeline operator Przedsiebiorstwo Eksploatacji Rurociagow Naftowych (PERN). The company was locked out of DEC's privatization, however, and could also be barred from bidding for PERN, Wozniak said.
Nevertheless, PKN may well try to acquire state-owned storage operator Naftobazy, although that move risks being labeled anti-competitive by the European Union (EU), Wozniak said. He said the Treasury Ministry is likely to keep a 51% stake in Naftobazy, which needs zl. 5 billion ($1.22 billion) in investments over the next decade to expand Poland's fuel reserves. As the largest oil company in the country, and as Naftobazy's biggest client, PKN is expected to end up paying for those upgrading costs. The need for that capital could push Naftobazy toward PKN, he said.
PKN is also sure to put in a bid for a 20% stake in Slovak oil refinery and retailer Slovnaft. That stake is valued at $56 million-$60 million, analysts said. "They'll try to do it," Wozniak said. "It's very important to PKN."
Several companies are chasing Slovnaft, including Austria's OMV, Hungary's MOL, French-Belgian company Totalfina and Anglo-Dutch firm Shell, said Aziz Unan, an analyst at Erste Securities. PKN's management is particularly worried about OMV and MOL's intentions, analysts said. "This investment would be more important to PKN than to Shell," Wozniak said. "It's a way to secure against competitors in the southern part of Poland."
Central Europe's fuel market suffers from oversupply and the only reason MOL and OMV want Slovnaft is to move into southern Poland's relatively untapped fuel market, Mierzwa said. OMV has its own refinery in Vienna and doesn't need one in Bratislava, which is 50 kilometers away from the Austrian capital, to serve either its home market or the Slovak one. Similarly, MOL has three refineries in Hungary and would acquire Slovnaft to serve Poland, he said.
With much of western Poland lost to foreign gas stations, PKN is concentrating on bolstering its market share in the south. In 1998, 23% of PKN's retail sales came from north and southwestern Poland, while 46% alone came from the southeast, Mierzwa said. Until now PKN has enjoyed little rivalry in that area, which Western gas companies haven't considered important, he said. Should OMV and MOL get their feet in the door, this could no longer be the case, analysts said.
If PKN is successful, it will effectively lock its competitors out of the market. "It will make it impossible for (them) to enter in the future," Mierzwa said.
But timing is crucial. While the Treasury Ministry intends to press on with its offering of PKN shares in the second half of the year, it will want to avoid July and August, typically quiet months on the WSE, Mierzwa said. Furthermore, with other state-owned oil firm Rafineria Gdanska gearing up for its IPO in the fall, PKN's second public offering is likely to happen in the middle of 2000 or at the very end, he said.
The Slovak Treasury Ministry is due to select a strategic investor for Slovnaft around May or June, analysts said. If the Polish Treasury Ministry delayed its offering in PKN, the oil firm will likely have to take out a loan to pay for the acquisition, Mierzwa said.
PKN has other options at its disposal. It has a fairly healthy cash position with a current debt-to-equity ratio of 20%, meaning it could organize a bank loan without much trouble, analysts said. Furthermore, it can choose to issue convertible bonds, Mierzwa said. But PKN appears to favor equity issues, he added.
