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Rothschild readying for SPP advisory tender

Following the successful sale this summer of a 51% share in fixed line monopoly Slovenské telekomunikácie (Slovak Telecom - ST) to Deutsche Telecom, all eyes are now on the upcoming sale of a 49% stake in gas utility Slovenský plynárenský priemysel (Slovak Gas Industry - SPP). The government is saying the deal should be done by the end of 2001, while potential investors - the likes of Gaz de France, the German Ruhrgas and Wintershall, the Italian SNAM, the Russian Gazprom and the American firm Cinergy - are beginning to signal interest.
The first major step towards the sale is the selection of a privatisation advisor, a tender for which was advertised in the Financial Times October 6. Potential advisors have until November 14 to submit their bids; Mariuš Hričovský, advisor to Economy Minister Ľubomír Harach, reported that 10 investment banks had already applied as of October 13.
One of the interested parties is investment bank N.M. Rothschild & Sons of London. The bank's director, Charles Mercey, spoke with The Slovak Spectator on October 31 about the approaching tender.

Following the successful sale this summer of a 51% share in fixed line monopoly Slovenské telekomunikácie (Slovak Telecom - ST) to Deutsche Telecom, all eyes are now on the upcoming sale of a 49% stake in gas utility Slovenský plynárenský priemysel (Slovak Gas Industry - SPP). The government is saying the deal should be done by the end of 2001, while potential investors - the likes of Gaz de France, the German Ruhrgas and Wintershall, the Italian SNAM, the Russian Gazprom and the American firm Cinergy - are beginning to signal interest.

The first major step towards the sale is the selection of a privatisation advisor, a tender for which was advertised in the Financial Times October 6. Potential advisors have until November 14 to submit their bids; Mariuš Hričovský, advisor to Economy Minister Ľubomír Harach, reported that 10 investment banks had already applied as of October 13.

One of the interested parties is investment bank N.M. Rothschild & Sons of London. The bank's director, Charles Mercey, spoke with The Slovak Spectator on October 31 about the approaching tender.


The Slovak Spectator (TSS): What are you doing in Slovakia?

Charles Mercey (CM): Our immediate reason for being here is to collect documents in connection with the advisory tender. We've also taken the opportunity to see one or two people connected with the privatisation, just to introduce ourselves and talk about the issues we think may arise in the privatisation. We at Rothschild have targeted the privatisation of SPP as the prime Slovak transaction to occur in the next year or so, and we would very much like to be part of it. We have played the role of advisor to governments or state companies in many gas sector privatisations.


TSS: What 'issues' have come up in your talks with the government so far?

CM: We haven't come to discuss the tender because I don't think that would be appropriate, but we have discussed the manner in which the privatisation could be undertaken, how the 49% of shares in SPP might be sold - whether this could be structured as contemporaneous sales to strategic investors and public offerings, or whether there would be value in doing it in a staged fashion so that the trade investor is brought in first, and hopefully pays a very high price for the stake, setting some form of benchmark against which the public offering could take place. It's really just been talking about tactics that might be employed both to maximise value for the government and to try to ensure their other objectives are met.


TSS: What is the most important role that an advisor plays in tenders of this kind?

CM: The main role of the advisor is to make sure the tender takes place in a fair and transparent fashion, so the maximum number of potential buyers are willing to enter the process. The danger otherwise is that a lot of people are discouraged from participating because they feel the transaction has in effect already been pre-sold to some particular party. It's all about trying to ensure a level playing field, and we understand that's very much the government's idea.


TSS: Will this be an easy sale for the advisor, given the amount of interest that has already been expressed in SPP?

CM: There are certainly a number of people who have expressed interest in the process, a number of whom are grouped together. It will be in the government's interest to maximise the competition with that group, by bringing in people like Cinergy, who have demonstrated in the last week by buying a gas distribution company in Athens, Greece, that they are very serious players in the gas business. I think there's also a strong chance to bring in another European entity in addition to those that have already expressed interest.


TSS: SPP's exclusive supplier, the Russian firm Gazprom, has proposed the construction of a new pipeline across central Europe, a line which may or may not cross Slovakia. Will this uncertainty be a curve-ball for the SPP sale advisor?

CM: I think all the people who are or may be interested in this opportunity in Slovakia have been aware of this [proposal] for a long time. I think by this stage they will have taken it into account, and that the prospect of this connecting pipeline running from Jamal [pipeline] down [from Poland] into Slovakia is something that people interested in SPP will look on very favourably. But in a sense these are long-term issues because I understand there is a lot of debate going on at government level, not only here but also in Poland and the Ukraine as to where the link should be built. So it's not much of a curveball - people take the view that gas exports from Russia will increase fairly steadily over the next 10 to 15 years, and the issue is only what proportion of that increase will come through Slovakia.

I don't think it's a threat in any way to the success of this privatisation. One of the things the advisor will have to look at is the extent to which particular sorts of buyers may be influential in bringing more gas through Slovakia as opposed to Poland.


TSS: How much could SPP fetch?

CM: I think it would be a bad idea to speculate, because a lot of the things that will determine the value have yet to be set. The government is doing all the right things in saying it still has to decide what proportion of the company to sell, the regulation to which it will be subject, the initial level of prices - those things will have a major impact on the value of the company, even more than the number of kilometres of pipeline that are there. It's a mug's game trying to predict numbers at this point; the only thing you can be sure of is that you'll be wrong.


TSS: Some of the bidders in the recent Slovak Telecom tender complained they often learned important information only through the press. What lessons can the government and the future SPP advisor draw from this summer's events?

CM: I gather the government is very concerned that this tender should be seen to be a success, and this is much easier to demonstrate if you have multiple bids than only one [Deutsche Telecom was the only bidder for ST after Telekom Austria and the Dutch KPN withdrew from the tender - ed. note]. We would see it as one of the advisor's major tasks to ensure that there is competition. SPP's size means that even the larger western energy companies are going to want to bid for it in consortia, so that's naturally going to limit the number of people. It appears that three of the obvious prime candidates or buyers have got together [Ruhrgas, Gaz de France and SNAM - ed. note]. Those three buyers provide a large part of the transit revenue at the moment, so they will be seen by other energy companies as people who understand this company [SPP] and this business better than most, so people have to be quite brave to take them on.


TSS: If you became the advisor and then became concerned that the tender was not transparent, how would you handle it?

CM: We are concerned that the process takes place in accordance with some pre-set and objective rules that everybody understands and has access to. We understand that's the government's objective. In my experience, often when you get allegations of people learning things through the press, it may be true but it's often the result of mistakes on the part of advisors as much as conspiracies to keep people in the dark. It's often because people just don't do what they should be doing. But ultimately, the decision on how much information is to be released to the public sector is up to the government body running the privatisation. What we don't like being involved with is any process that purports to be transparent, but which is nevertheless being settled in a manner that is inconsistent with the rules presented. That would make us very uncomfortable.

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