Unreasonable demands

By Timothy Sifert

Investment bankers are complaining about the treasury ministry's process of selecting a company for the coveted advisory role in state-owned PKO BP's planned, but stalled, privatization.

The request for proposal, drafted by the treasury ministry, is entirely too strict and prohibitive, containing specific requirements that bar a large number of competent financial institutions from even being considered, disappointed bankers said.

"It was impossible," said Rafał Gębicki, the director of the corporate finance department at WestLB. "I was really surprised. It's not a normal procedure."

The very prospect of the sell-off of one of Central Europe's largest state-owned banks, which will probably be completed via an initial public offering in Warsaw and on a western exchange, initially had bankers and institutional investors eagerly lining up.

A dearth of investment-worthy stocks on the WSE, in addition to PKO's growth potential as the country enters the European Union, make it a blatant target for financial institutions - especially in a bear market.

"We decided not to participate because the legal framework was too stringent for us," said a banker at one large international investment bank. "I couldn't convince my internal lawyers that we should do this deal."

For some of the larger - and often more competent - firms, the bitterest pill in the request for proposal was the treasury's refusal to offer banks' indemnity for the information that PKO provides a selected adviser when its conducts its usual due diligence before going to investors for a transaction.

"If we do the internal due diligence on PKO BP, the state treasury won't give the bank (a guarantee) saying that the information provided is correct," said the banker, who asked not to be named. "If something goes wrong, (someone) can sue us."

He did note, however, that the treasury sometimes doesn't provide an indemnity clause to advisers, but that on a privatization as important as PKO's, it should give one. Bankers added that PKO's privatization has been made even more sensitive, given that the treasury ministry is likely to fall well short of its €2.1 billion (zł. 9.1 billion) privatization target for this year.

"The second issue is that the requirements are too stringent," the banker said. "If you advise on PKO BP, you can't do business with other Polish financial institutions."

He explained that the selected adviser is more or less forbidden to seek other business in the finance sector during the term of the privatization, which for many involved is too much of an opportunity cost.

In addition, WestLB's Gębicki pointed out the paramount reason his firm could not do the deal.

"The specifications in the proposal were such that a potential adviser could not conduct any activities (similar) to PKO BP's," he said. This is a particularly harsh requirement because PKO encompasses a number of operations, including commercial banking, lending, securities trade and some corporate advisory. Other firms that offer those services would not be able to participate.

Treasury minister Piotr Czyżewski recently stated that PKO's privatization has been delayed due to inquiries from potential advisers.

"PKO BP privatization is possible in the first or second quarter of next year," Czyżewski said. "We have extended the deadline for privatization adviser offers. There have been very many questions asked by those interested and we decided to extend the deadline. The procedure of adviser selection must be clear and precise."

The investment banker said that the wording of the request for proposal, which is just another in a long line of difficulties surrounding the country's tender processes, could threaten the success of a PKO transaction.

"That is why they have a problem getting a high-profile investment bank on the deal," he said.