Incapable state: the troubles and causes of failure to sell stake in OMV Petrom oil company

A recent attempt of the state to sell 9.84% of shares in major Romanian oil company Petrom (majority owned by OMV) has failed as investors who responded to the offer managed to underwrite less than the 80% of the shares, which was the minimum required. Let’s presume the Government led by Emil Boc really wanted to sell the Petrom stake (If they only claimed so to please the IMF then people responsible should be judged for high treason). The failure of the Petrom share sale filtered through a government crowded with impotent officials: from the politically semi-illiterate PM Emil Boc to Florin Vladan, an obscure official who negotiated on Romania’s behalf despite not even Google has ever heard of him. One should not forget catastrophic Economy minister Ion Ariton, one of the weakest ministers of the past two decades. Let’s consider the causes of the failure one by one.

1. The selection of an intermediary for the sale of the OMV Petrom stake held by the Romanian Economy Ministry

Six consortia joined the bidding. Each was lead by a big name: Goldman Sachs, Nomura, JP Morgan, Morgan Stanley or UBS, with huge experience in such deals and with obvious connections in relevant markets, plus a consortium led by Renaissance Capital, a Russian investment bank controlled by billionaire Mikhail Prokhorov, the head of a new party formed under the wing of Vladimir Putin.

The specifications of the bidding provided generous points to the financial offer. It was Achille’s heel as outsider Renaissance Capital (plus „lieutenants” EFG Eurobank Securities – BT Securities – Romcapital) offered too small a price, undermining all other offers. Winning the bid raised a huge question mark for the entire market and sent shivers among those familiar with the energy market: a Russian investment bank was on the receiving end of all the data of Romania’s strongest company in this sector.

„It was terrible news for us. It was a blow. How would you, the state, leave all the secrets at the hand of Russians?” a significant energy market player said at the time.

His concerns were based on real facts: Russia’s political play uses economic leverage. That’s how Gazprom has become the stick to silence disobedient neighbors (see the case of Ukraine in 2009). And nothing is what is seems in Moscow: private companies have long been dancing to the tune of Kremlin or of the FSB headquarters, or risk going the route of Yukos.

Given the circumstances, why didn’t anybody at the Economy Ministry or at the Government ask how come a a consortium led by Renaissance can offer such a low price that strong rivals are forced out? Let’s say there wasn’t any strategic risk – then wouldn’t such a huge difference between the winning offer and the extensively shared market expectations be suspicious?

Well, the public reaction of the Ministry was to hail the news: a ministry press release on April 4, 2011 said the action was a success considering that, at an estimated value of the transaction of over 500 million euro, the success commission was of some 1.6 million euro, way below market expectations of about 4-5 million euro.

Therefore, there was no concern at the ministry led by Ion Ariton. No questions raised about the obvious difference in stature between Renaissance Capital (which is specialized in emerging markets) and the other heavyweights (JP Morgan, Goldman Sachs etc.). An no question marks about the real capabilities of a Russian company specialized in emerging markets to deliver the Romanian offer to major investors on Western markets.

One should note that the head of the commission formed to prepare the sale and choose an intermediary was Florin Vladan, deputy head of the Office of State Ownership and Privatization in Industry. We’ll return to him later.

2. The offer of the Economy Ministry

The very low discount offered for the minimum accepted price led to a common reaction of reject among small stock exchange investors. What could have become the signal of a major interest in Bucharest Stock Exchange trading has turned into a total fiasco. Response among foreign investors was low as well.

Who made the decision to fix a totally unattractive minimum accepted price per share (0,3708 RON)? Radu Nilas, head of BT Securities (a member of the winning consortium) says in an interview with Romanian newspaper Bursa that the price was decided by the Economy Ministry and the consultant had to fall in line. Will any head roll at the ministry following the decision?

3. Public communication

A selling offer on the stock exchange is usually accompanied by proper communication. The seller must stimulate the market and produce the critical mass of interest in his product. In this case, the Seller is the Romanian state represented by the Government – the Economy Ministry, to be more precise.

Well, PM Emil Boc had never met representatives of foreign investors potentially interested in these shares (or, if he did, there’s no mention of it on the Government website). So, there wasn’t any public signal that the Government is interested in promoting its offer. That, in Boc’s case, is no surprise, unfortunately. The prime minister usually keeps a low profile on his meetings with business people, given his below average experience in the economic sector and his visible discomfort in talks with representatives of the business environment.

The total lack of interest of the Seller is proven by Economy minister Ariton’s behavior as well. He hasn’t had any meeting with potential investors either – in Romania or abroad (at least one that should deserve a note on the Ministry’s press releases web page). Such an apathy isn’t anything close to a surprise in Ariton’s case either. A character with no relevance for the economic environment, Ariton has gained a sad fame among business people and the media: he’s the minister who avoids business meetings, interviews and conferences where he’s expected to speak publicly.

So, those supposed to have the initiative were missing completely. The „Petrom subject” only existed in business media – counting the blogs and forums of experts and insiders. There was no real buzz, no talk on the market about what should have become the event of the year for the Bucharest Stock Exchange. No wonder that small potential investors were not lured into this game.

4. Disconsidering large potential investors

When the Romanian state sends someone without a trace on Google to negotiate with major investment funds, two options come about: he’s either a strong but low-profile individual, or he’s the representative of an idiotic state.

More precisely, the consultant at one point organized a road-show to London where Petrom and Romanian state representatives were expected to discuss with investment funds about the offer to sell 9.84% of OMV Petrom. While the oil company sent his most prominent representatives (CEO Mariana Gheorghe and CFO Daniel Turnheim), the Romanian state sent Florin Vadan, deputy head of the Office of State Ownership and Privatization in Industry (OPSPI).

The decision to send this individual lacking any track of relevance was damaging for two reasons:

A. The main issue for investment fund representatives was the liberalization of gas prices in Romania (which the profitability of Petrom and medium- and long-term development prospects rely upon). This is a political matter and answers may come from very few key people: prime minister or minister. What should a man with no relevance in the governing party/coalition or in the Economy Ministry decision-making frontline tell people who manage billions of euro? What could these managers have understood during talks with somebody in the third line of the decision-making echelons?

B. In business as in politics or diplomacy there is a certain code of dialogue. There are different „leagues” as one commentator once said. Florin Vladan hasn’t any relevance for the domestic business environment, nor for the international one. He only worked in state structures, if we consider his CV, provided at HotNews.ro request. He has no other links with the economic sector beside several nominations in the boards of state-controlled companies. He hasn’t any economic studies and has never spoken at in international conference – or at least one that the memory of Internet retains. He shouldn’t have attended the meetings with investment fund managers as the sole representative of the Romanian state. Who made the decision to send him alone to London despised discussion partners.

5. The Government’s dual policy towards energy market liberalization

The populist and protectionist behavior of the Government towards the energy market also contributed to the climate of distrust among investors. As long as the regulator of the energy market lacks independence and is politically subordinated, incertitude shadows the plans of potential investors. Or, during a period of general incertitude, postponing the political decision to remove the reins on natural gas prices (on electoral grounds) can only make a business initiated by the Government itself more difficult.

6. International framework

Foreign markets are going through times as difficult as the fall of Lehman Brothers. Any business deal is analyzed ever more closely and emerging markets such as Romania tend to be avoided by big investors.

Neither the consultant, nor the Government could influence this. What they could have done instead was to limit the number and magnitude of domestic factors contributing to the incertitude.

Effects of the failure:

While summer vacation takes away much of the interest in the issue, the failure of the state to sell a stake in Petrom has several long term effects:

1. Sending a strong negative signal. When one fails to find buyers for a stake in Romania’s biggest energy company, one faces major vulnerabilities. And future sales – already promised in a deal with the IMF – will be made under strong pressure from buyers dealing with a weak seller.

2. Paradoxically, the failure today may mean a possible success in the future. Should the euro zone and the US recover from what may become a second wave of the crisis, Romania can put the stake on sale again, on a much calmer market with a taste in investing on emerging markets. But there are too many „if”s here.

3. The failure has an impact on the Romanian exchange as a long expected relaunch of the stock exchange has been postponed sine die.

4. Paradoxically again, Romanian tax payers may cool down for the time being. The experience of the latest large scale privatizations shows that the money obtained has been spent by two governments (led by Tariceanu and Boc respectively) not on investments, as law requested, but on electoral giveaways. This time around, failing in a privatization procedure means state property is preserved and a future government might get more value out of it. But looking at the current government marked by incompetence squashes any hope.

One last note: three of the key characters in the affair (PM Emil Boc, minister Ion Ariton and OPSPI official Florin Vladan) have no relevant experience in the private business sector. They’ve all built their careers within the structures of the state or of state-controlled companies.