The Electrica IPO had a "comfortable" outcome

IOANA POPA, ALINA TOMA VEREHA (Translated by Cosmin Ghidoveanu)
Ziarul BURSA #English Section / 27 iunie 2014

The Electrica IPO had a "comfortable" outcome

Update 19:57 Nicolescu: "The third shareholder of Electrica is ING"

The European Bank for Reconstruction and Development (BERD) has become the second largest shareholder of Electrica, after the Romanian state, by investing 75 million Euros in the IPO which concluded on Wednesday, and the third largest shareholder is Dutch financial group ING, delegate minister for Energy, Răzvan Nicolescu, said yesterday, quoted by sources in the press.

He said: "The second shareholder of Electrica, after the government, is the European Bank for Reconstruction of Development, with 75 million Euros, and the third is ING, which has participated in the IPO with several entities".

The Minister added that out of the almost 21% that was made available to retail investors, 11% went to small retail investors (with subscriptions of up to 20,000 shares each - ed. note), and 10% to the big retail investors (over 20,000 shares).

"On the small retail tier, we have at least 2,000 new investors who entered the stock market and we think that this is outstanding", Nicolescu went on to say.

The dignitary said that the approval of the British authorities for the listing in London of the GDRs denominated in dollars subscribed in the IPO of Electrica was also received today (ed. note: yesterday).

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Update 17:53 The EBRD buys 8.6% of Electrica, for over 320 million lei

The EBRD has acquired 8.6% of the shares of Electrica, in exchange for over 320 million lei (75 million Euros), according to a press release sent to our editors.

In doing so, the EBRD invests in the infrastructure of the company. The bank's funds will also help make the network of Electrica more flexible, thus responding to the recent increase in Romania's capacity relating to renewable energy.

The investment of the EBRD also allows the bank to support a comprehensive plan for improving corporate governance, the internal audit systems and the environmental management practices of Electrica. In that regard, the representatives of the bank and of the energy company have signed a framework agreement for implementing a plan of action concerning corporate governance, as well as a social and environmental plan of action, the press release of the EBRD states.

Nandita Parshad, energy director with the EBRD, said: "The IPO of Electrica (the biggest so far in Romania) is a milestone. Our involvement proves the commitment of the EBRD to support the government's plans to continue with privatizations in the energy sector. We will cooperate with the company to implement a set of ambitious measures, to align corporate governance to the international standards. This will provide additional comfort and trust to potential investors".

In turn, the minister of Energy, Răzvan Nicolescu, said, in London, during the roadshow for the listing of Electrica: "We are confident that the EBRD will be a long term partner for Electrica, and that it will use its vast expertise to support the implementation of the corporate governance standards in the company. We are hoping that this IPO will promote Electrica and, thus, Romania, as a good destination for business, stable and predictable for investments".

The EBRD also points out that the transaction will also contribute to the development of the domestic equity market, by setting a major benchmark for future listings and helping increase the liquidity of the markets.

So far, the bank has invested approximately 6.7 billion Euros in 360 projects in Romania and has mobilized over 14 billion Euros from other financing sources.

The number of shares for retail investors was supplemented by 6% - 4% for small investors and 2% for the big ones

UPDATE 13:15 The final price of the IPO was set at 11 lei/share

The final price of the IPO at which the shares will be sold to institutional investors and big retail investors has been set at 11 lei/share.

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UPDATE 11:15 The intermediaries of the Electrica IPO have announced the allocation ratios for big and small investors.

For every 100 subscribed shares, big investors will receive 14.75 shares, whereas on the small tier, those who have exceeded the guaranteed number of subscribed shares (of 1000 shares/per person) will receive 33.03 shares for every 100 shares subscribed.

It follows that approximately 6% of the shares available to institutional investors have been moved to the retail tier as follows: 4.05% to small retail investors and 2% to the big retail investors.

The calculation

1. The small tranche (12.4 million shares - 7%)

The allocation of 0.33% means the unguaranteed segment has been oversubscribed three times. At the end of the IPO, 33,968,000 shares had been subscribed.

33,968,000 shares/3 = 11,322,666 shares are available on the segment that does not get a discount.

After subtracting the guaranteed subscriptions, 4,133,235 shares would be left on that segment, according to the initial structure of the IPO.

Hence an additional 11,322,666 - 4,133,235 = 7,189,431 shares (in other words 4.05% of the IPO) have been allocated.

2. The tier for small investors (14.1 million shares initially allocated -8%)

The allocation of 0.14% means an oversubscription of 6.77 times. At the end of the IPO, a total number of 120,068,502 shares had been subscribed.

120,068,502 shares/6,77 =17,735,376 available shares, after the supplementation.

It follows that an additional number of 17,735.376 - 14,175,100=3,560,276 shares have been allocated (that is 2% of the IPO).

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Update 11:00 Alexandru Elian, Blue Rock Financial Services: "The tranche of retail investors increases to 21%"

Retail investors will receive 47.209 million shares of Electrica, in other words 21% of the shares on offer, 6% more than was initially stipulated, according to Alexandru Elian, director at Blue Rock Financial Services.

Big investors will receive 17.718 million shares, representing 10% of the total number of shares (as opposed to 8%, as was initially stipulated), whereas small investors will receive 19.49 million shares, the equivalent of 11% of the total number of shares (compared to the level of 7%, which was stipulated in the prospectus of the IPO).

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UPDATE 09:55 The underwriter of the Electrica IPO has released the allocation ratios

Electrica has exercised the right to reallocate shares between the tranches, according to the provisions of the Prospectus and the Amendment to the Prospectus and has announced the allocation indexes for the tier for big investors and for small investors in the IPO.

Thus, the allocation ratio for the Big Investor Tier is 0.1475952193, and 1 for the small investors tier who are entitled to receive a maximum of 1,000 guaranteed shares. 0.3303339908 for small investors that do not receive guaranteed allocation, according to an announcement posted by the underwriters on the website of the Stock Exchange.

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The Electrica IPO has demonstrated the untapped potential of the domestic retail investor segment, which should serve as a lesson to the authorities, sources from the stock market said yesterday, who added: "In the coming IPOs, the attention of the Romanian government should focus on the domestic market".

The Electrica IPO was very successful with all the categories of retail investors, but it seems that on the tier for institutional investors the expectations of our authorities have been too optimistic, as according to our calculations, the shares were only oversubscribed 1.5 times.

Răzvan Nicolescu, the minister for Energy, explained yesterday: "Given the positive welcome that the shares of the company received on the retail segment, I have asked the consultants to review the possibility of using the discretionary mechanism for reallocating shares between the tranches, with just 7%, compared to just 5%, as stipulated by the automated mechanism, so that the retail tier will reach 22% of the IPO".

Also yesterday, the Department for Energy has announced in a press release, that the IPO of Electrica has been "comfortably" oversubscribed, both on the retail tranche, as well as on the tier for institutional investors.

According to the dictionary, the word "comfortable" can also be interpreted as "cozy".

In other words, that the "subscription of the Electrica IPO has been successfully completed", as announced in the press release, doesn't exactly mean a great success (just because over 100% of the IPO has been subscribed), just comfort.

The structure of demand in the Electrica IPO shows that Romanian investors could have easily bought all the shares put up for sale in the IPO and that foreigners did not rush in to buy to the extent that Romanian officials expected them to.

Voices from the stock market claim that the fact that interest on the tier for institutional investors was less than expected has caused the authorities to ask the underwriters to increase the quota of shares allocated to the retail tier to 22%.

Gabriel Dumitraşcu, the head of privatizations in the Department for Energy said yesterday that over 25% of the institutional investors who subscribed are Romanians, namely pension funds from the local market and, for the first time, the SIFs. He said that British investors have accounted for 23% of the demand on that tranche, 17% went to Polish investors, and American investors accounted for 13%.

94% of the institutional investors are long term investors while the rest are hedge funds, according to Mr. Dumitraşcu.

According to estimates from the stock market, the closing price of the IPO would be a little over 11 lei/share (the minimum in the IPO), the total value of the sold stake is approximately 435 million Euros.

There has been criticism in the market about the long delay in setting the price and the allocation. Some investors have complained that there have been no clear criteria for setting the price. In the prospectus, the underwriters said that the allocation was going to be made according to quantitative criteria, but, after more than 24 hours from the conclusion of the IPO no allocation was made according to those criteria, voices in the market raised the concern that the shares would be distributed to "buddies" and "favorites".

Răzvan Nicolescu, satisfied with the subscription rate

Răzvan Nicolescu, the delegate Energy minister, said yesterday, in a press conference: "This stage of subscribing has been completed successfully. I am pleased with the level of subscription. It is comfortable. Most of the institutional investors come from Romania, UK, Poland and the US. We have also attracted new investors, which is a very good thing.

There has been talk about Electrica in all the major financial centers of the world, London, Paris, Frankfurt, Vienna, Warsaw, New York and Boston, where the road-show was held. The objective we took on two weeks ago, to have the oversubscription rate of 200%, has been surpassed. Thus, the total demand for Electrica shares has been 2 times greater than the supply. We will also have a strategic partner among the company's shareholders - the EBRD".

Gabriel Dumitraşcu also commented on the context of the Electrica listing: "It is very important that the IPO of Electrica has generated a significant response in the current geopolitical context, and also given the fact that 22 other IPOs were being held at the same time in Europe, of which some, such as Wizz Air, have failed. The airline has withdrawn its offer to go public because it found there was insufficient demand. Also, prior to the beginning of the IPO and during the subscription period, unexpected events occurred on the Romanian energy market, in the context of the investigations of the DNA investigations. I think that the name of Electrica has received undue public exposure in those investigations, before and after the IPO. The offer of the Proprietatea Fund to sell approximately 5% of Romgaz took place in the subscriptions of Electrica and has diverted some of the money that investors had prepared for Electrica".

He says that given all of these factors, the aggregated oversubscription rate of more than 200% of Electrica is significant.

The head of privatizations of the Department for Energy said that the significant oversubscription on the retail tier had generated the boost that the IPO of Electrica needed and that the IPO has succeeded in generating approximately 2,000 new trading accounts.

Gabriel Dumitraşcu also mentioned that demand on the retail tiers had been inflated by bank support products, which investors had used in the last few days of the IPO. "This indicates that the decision to have a tier of small guaranteed investors was correct. We want to have an appropriate response to the retail tier by transferring 5% from the institutional tier over".

Through the qualitative allocation, the authorities claim that they are also looking to achieve a good performance of the price of the stock of Electrica in the secondary market, after the IPO. Mr. Dumitraşcu says that this model of privatization of the distribution of energy through the stock market will prove better than the one involving a strategic investor used for five of the branches of the Electrica group between 2004 and 2008.

The calculations of Alexandru Elian: "The institutional tranche oversubscribed 1.5 times, prior to the transfer of the 7% to the retail tier"

Alexandru Elian, director of Blue Rock Financial Services, draws up a possible scenario concerning the reallocation of the 7% block in the IPO to the big and small investors, starting off from the premise that the allocation of two tranches will be done in proportion with their initial sizes. This would result in an oversubscription rate of over 2.2 times, on the unguaranteed tier, and 4.34 times on the big investor tier.

On the tier for institutional investors, the oversubscription rate would increase from 1.5 to 1.8 times.

He told us: "According to the official statements, the 177,189,000 shares in the IPO have been oversubscribed over 2 times.

Assuming (the 2x figure is random) an oversubscription rate of 2.2 times, this would mean demand for 389 million shares.

We are now subtracting the numbers we know - 8,269,977 guaranteed shares, up to a 1,000 shares, 33,968,000 unguaranteed shares on the small tier and 120,050,467 unguaranteed shares on the big investor tier. It follows from this that the institutional investors have subscribed 226,711,556 shares, compared to the 150,610,650 shares they had initially available (85% of the shares sold in the IPO had been allocated to the institutionals), which means an oversubscription rate of 1.5 times.

Along the same lines, we move 7% of the IPO (24,320,058 shares) sent to the retail tier (my personal scenario) pro-rated to the initial allocation, meaning 46.7% to the small retail tier and 53.3% to the big retail tier (because in the beginning, 7% went to the small tier and 8% to the big tier).

Now, the small tier looks like this: 12.4 million shares (the total number of shares on the tier), less 8,269,977 guaranteed, plus 11,349,360 from the reallocation, equals 15,479,383 shares, compared to 33,968,000 subscribed shares, which results in a degree of oversubscription of 2.2 times.

The big tier looks as follows: the total number of shares allocated to that tier - 14,700,000 shares plus 12,970,698 shares resulting from the reallocation equals 27,670,698 shares compared to 120,050,467 shares subscribed, which makes an oversubscription ratio of 4.34 times.

The institutional investor tier looks as follows: 226.711,556 million subscribed shares (presumed) compared to 126,290,592 shares available, hence an oversubscription rate of 1.8 times".

Konieczny: The Proprietatea Fund will negotiate the sale of the branches of Electrica to the new shareholders

Grzegorz Konieczny, the manager of the Proprietatea Fund, yesterday said that he has negotiated two alternatives for selling the stakes of 22% each that the Proprietatea Fund holds in three branches of "Electrica". Those were an exchange of shares - a stake in Electrica in exchange for the shares in the three branches -, an alternative which the government rejected immediately, or the sale of the stakes in the branches to Electrica, according to Grzegorz Konieczny. He said that the authorities have deemed it too risky to negotiate the latter option and have decided that it would be best if the talks were held between the Proprietatea Fund and the new management of Electrica, after the IPO. (A.A.)

BROKERS:

"Retail investors have once again shown interest in the listings of the state"

Romanian brokers are saying that the IPO of Electrica has once again demonstrated the major interest of retail investors in the IPOs of the state. They have noted the very high demand for the shares of Electrica and they were expecting them to be supplemented.

Marcel Murgoci, director of operations at Estinvest, told us: "The intention of the state to allocate additional shares from the Tier of Institutional Investors to the Tier of Small and Big Investors was stipulated in the prospectus: namely that after the closing of the IPO, the company will reallocate 5% of the total number of shares on offer on the Tier of Institutional Investors to the tier of Small Investors and/or Big Investors if the rate of oversubscription is higher on the latter than it is on the Tier of Institutional Investors.

Also stipulated in the prospectus is the fact that after the closing of the IPO, the company, after consulting with the Global Coordinators, can decide the further reallocation of shares out of the total number of shares from the Institutional Tier to the Small and Big Investor Tier. As a result, the decision of the government to do a reallocation was to be expected".

In his opinion, the offering of Electrica has concluded successfully because over 100% of the shares have been subscribed and has noted that it has been proven once again that retail investors are interested and participate in the offerings in which the state floats stakes in its companies.

The representative of Estinvest has commented on the fact that the tier of small guaranteed investors was not fully subscribed (ed. note: 8.27 million shares were subscribed out of the 10 million made available) shows that retail investors are more interested in a discount off the final price. "During the IPO, various opinions have been presented on whether the decision of the government to separately offer a discount tier and a guaranteed tier was opportune or not. What is important is for the government to review the manner in which the IPO was performed and to optimize the methodology for the future IPOs".

Nicolae Gherguş, CEO of Confidentinvest, said: "I don't want to make any assumptions about the volume of shares subscribed on the tier of institutional investors and I would like to remain optimistic and believe that the Government has begun to understand the role of retail on the stock market and in the privatizations of the state. The successful privatizations in Poland and in the other Eastern countries have been done with generous discounts and allocations for retail clients. The speculations of the government officials concerning the speculative investments of the retail investors are unfounded and condescending. They should concern themselves with the good governance of state owned companies, with increasing their efficiency and terminating the unprofitable contracts they are involved in. For example, Transelectrica went public five years ago and its price still has not returned to its IPO level".

Concerning the guaranteed tranche of Electrica, he thinks that it is difficult for everybody to admit that in Romania there are less than 10,000 active investors on the Romanian stock market: "Their number should have been increased over the years through the privatizations, by granting them discounts and offering them healthy stocks and most certainly not all of them would have taken their profits and sold their stock. It's still not too late, it is an optimal moment for the stock market, when the financial markets are full of liquidity and the money is very cheap".

Alin Brendea, deputy CEO of Prime Transaction, said: "We can say that the IPO has been successful, even if not spectacularly so. Indeed, I think that the success of the IPO can only truly be measured at least one year after the moment of the listing, because the evolution on the secondary market is important, as is the way in which the company will relate to the stock market".

His opinion on the increase of the number of shares made available to the retail tiers was a reaction to the discontent created by the Romgaz IPO, when the massive oversubscription heavily diluted the subscriptions of the retail investors. According to the representative of Prime Transaction, the authorities are trying to provide a greater degree of subscription coverage, which is something that is positive for the domestic market.

Mr. Brendea said that, considering that there are almost 10,000 subscriptions, it can be said that this tier has also been successful. "On the other hand, perhaps a better promotion through the banking channels - which have full access to the retail investors - could have increased the number of investors present on that tier".

Alexandru Elian, executive at Blue Rock Financial Services, told us that retail interest was close to what was expected and that interest from institutional investors was below his personal expectations. He considers that a significant number of small investors have subscribed, that all brokerage firms have seen a number of new customers, but some small investors have preferred to subscribe on the tier where they would get a 5% discount in the first five days of the IPO.

(A.Z.)

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