October 25, 2010
By Christian Filipov in Sofia*
The future of Bulgaria’s capital markets is not a clear-cut case: its fate is linked to that of the global markets, the strength of the indigenous Bulgarian entrepreneurial spirit and – though this may come as a surprise to some – the immediate actions of the Bulgarian government.
Here emerge two outstanding issues: one, whether the government will lend a helping hand to the Bulgarian Stock Exchange (BSE) by deciding to privatize state-owned companies via stock offerings on the exchange; and two, whether the government will sell its quite substantial shareholding in the BSE to a reputable foreign exchange operator.
Rumor Has It…
At the moment, several rumors are going around in Sofia. One has it that a group of shady Russian businessmen is planning a hostile takeover of the BSE, with the help of treacherous insiders. No, scratch that- the hostile takeover guys are actually Turkish, and they are in cahoots with shady local businessmen and corrupt politicians.
Yet the notion of a hostile takeover of the BSE is ridiculous – an acquisition transaction in excess of 5% for the stock of the BSE would be invalid without the prior approval of the Commission for Financial Supervision. Ah, yes: here is the part where the corrupt politicians come into the game.
Another rumor, one that is gently forcing a smug smile onto the faces of Gordon Gekko’s fans in the country, is that the Deutsche Börse would be willing to take on the government’s share in the BSE. This, of course, is a reason to hear the repeated popping of champagne corks at gatherings of the private shareholders in the BSE and those of business analysts, investors, industrialists, employers, bankers, brokers and managers.
These market enthusiasts are convinced that if a reputable foreign stock market operator replaces the government at the BSE, trading volumes will double (at least!), while the BSE will become a much more attractive avenue for raising capital, and the listing of large infrastructure companies will be encouraged. To sum up: the euphoria of privatizing the government’s share of the BSE to a benevolent investor will levitate Bulgarian stock prices, if not into the stratosphere, at least to much higher levels than they have ever been.
A Government Buy-in?
While the rumor mills are spewing conspiracy theories and Cinderella stories alike, the government – the 600-pound gorilla that everyone is trying to ignore – owns close to half of the stock in the BSE, and is actually planning to increase its shareholding. Quite shockingly, the government is actually planning on nationalizing the stock exchange. Let us classify this as a rumor: just like the one about ‘them shady Russian/Turkish businessmen’ or that of the benevolent Deutsche Börse.
Now here is what has actually happened. The shareholders of the BSE at their meeting on September 13, 2010 decided to start offering shares of the BSE on the BSE itself. This is supposed to happen by the end of the year. The expected benefits are that the offering of BSE shares to the public will stir trading on the BSE (at least a bit); that the BSE will become a publicly-traded company (thus offering the stock exchange a greater level of protection from hostile intentions and undue influences), and that it will offer the BSE shareholders a means of increasing the return on their initial investments.
Prior to listing the BSE, however, Bulgaria’s Ministry of Finance – the principal holding the government’s 2.58 million shares in the BSE – requested that the capital of the BSE be increased by issuing an additional 715,000 shares, declaring that it would buy them at a price of 1 BGN per share, thus raising the government’s shareholding from 43.97% of the current 5.87 million shares to 50.5% of the shares.
Let’s follow the money here. The capital of the BSE is 9.59 million BGN, and the average price per share is 1.63 BGN. The BSE’s assets are 6.2 million BGN in cash reserves, 1 million BGN in deposits, 441,000 BGN in securities and 300,000 BGN in expected tax refunds. In the first two quarters of 2010, the BSE’s trading dropped by 24%, while BSE’s net profits from January through June 2010 are a meager 92,000 BGN.
Minority Shareholders- Frozen Out
So, the government’s offer to buy the new issue of shares for 1 BGN per share is quite a good deal. But here’s the rub: the transaction is envisioned to be structured in a way that the new issue will not be offered proportionately to the current shareholders: only the government can subscribe to the new shares. The minority shareholders in the stock exchange (126 corporate entities and 97 individuals) are not going to be given the opportunity to subscribe to this issue at all. Now, this has got your attention, hasn’t it?
Wondering why the government is increasing its share in the BSE brings the real concern to light: what will the government do with that 50% plus-one shareholding in the BSE?
Now let us speculate a bit. A first possibility is that the government is increasing its shareholding in the stock exchange in order to increase profits generated from the sale of its shares to a foreign stock exchange operator. A savvy but unlikely plan, from a practical standpoint, unless the government plans to take action that would make the stock of the BSE more valuable. Any smart buyer would ask “what have you done to increase stock value to justify an asking price higher that the 1 BGN per share that you paid?”
This basically reflects the views of Victor Papazov, co-founder and former Chairman of the Board of the BSE, who in a recent interview with Trud said essentially that unless the government does something to increase the value of the BSE, any foreign operator will offer less than the issue price of 1 BGN.
This line of thinking makes sense: if one plans to buy a troubled business that needs investment to turn profit, one would naturally want to buy it on the cheap. Such a line of reasoning also robs the economic sense of raising the capital of the BSE by increasing the government’s share in it, for the purpose of making a more successful sale.
Sweetening the Deal
Anyway, let us speculate on the issue of what the government could do to increase the share value of the BSE, and so sweeten the deal for the imaginary benevolent foreign stock market operator. One easy answer is that it could start privatizing state-owned companies via public offerings on the BSE, giving ”brownie points” to companies that are publicly traded on the BSE for procurement transactions associated with large infrastructure projects (highways, railways, ports, electricity generating plants). Another simple solution is that the government could offer tax breaks for private investments in mutual funds.
Nevertheless, such government actions are the wet dreams of the Bulgarian business elite: in a letter dated March 5, 2010, addressed to the prime minister and the ministers of finance and economy, the BSE, the Chamber of Commerce and several mighty associations (including those of industrial capital, the confederation of employers, the investment intermediaries and the management companies) urged the government – quite convincingly – to jump-start Bulgaria’s capital markets by selling on the BSE part of shares that the state holds in companies such as the Bulgarian Energy Holding, Bulgargaz, Bulgartransgaz, the Kozloduy nuclear power plant, the Maritsa Iztok coal-fired generation plant, the National Electricity Company and the Electricity Systems Operator.
Dark Visions
Since we are still speculating, let us move on to option number two- and the one more likely to convince those enamored of conspiracy theories. This option reaches deep into the bowels of post-communist cynicism: Boyko Borissov’s government plans to transform the stock exchange from a beacon of free capitalism into a tool of state control and planning.
Why? Well, under such a scenario, the government will be lending its sizable muscle to a market player of its choice who, aided by interference or non-action by the government, eliminates any competition and instills an everlasting monopoly on Bulgaria’s capital markets.
Such a thought would be strange only to someone who lacks familiarity with the post-communist transition process. In the transition environment – Bulgaria not being the exception, but rather the rule here – the state has been very reluctant to give away economic power gathered by fighting tooth-and-nail under communism, regardless of which political party rules the country, despite the stated ideological aspirations of that party or whatever economic doctrine the party claims to worship in the media.
Doing Business, Party-style
The public simply believes that political parties are in a symbiotic relationship with their economic supporters and business affiliates. In such a relationship the party feeds upon the fruits of the labors of its supporters and affiliated business enterprises. In return, the political party, by pressing the appropriate government levers at the proper moments, promotes the economic interests of their supporters and affiliated businesses.
Depending on the relative strength of the political party in question, actions associated with “promoting business interests” succeed, partially or completely, in eliminating the competitors of the party’s supporters in the particular economic sector. This practice is so prevalent in Bulgaria that it is well known which particular business sector has been carved out for the supporters of which particular political party.
The notion that political parties’ sole purpose is to promote the business interests of their supporter base is so widely accepted that no one questions it. This is a fine example of the bastardization of democracy and capitalism that people in transition countries are living through. It is almost iconically defined in the infamous words of wealthy businessman Ahmed Dogan, founder of the ethnically Turkish Movement for Rights and Freedoms (MRF) party: “every political party has its own ring of corporations… I have more power than any banker.”
In his painful directness, Dogan is not only referring to his own party. He is pointing his finger at all political parties in Bulgaria, to convey a simple message: this is the way things are done- get over it.
Although one need not agree with this statement, it is quite obvious that any arguments aimed at contradicting it become painfully useless. This is true to such an extent that a statement made by Volen Siderov (the fearless leader of the nationalist-populist party Ataka), to the effect that the NDSV (the political party of the former king Simeon II), is the “king’s brokerage firm in the Parliament” was not met with public outrage, but merely with knowing smiles. The case in point is how people take Siderov’s words- that is, that he is a populist and wouldn’t dare tell people anything other than what they are already thinking.
In light of this, speculations that the Borissov government is prepping the BSE for a takeover by its supporters and affiliated business doesn’t sound out of line with the prevalent cynical state of mind. There are enough arguments that we could fish out to support such a conspiracy theory.
Connections and Conjectures
Let us indulge then in feeding the rumor mills. For example, did you know that increasing the government’s BSE share was opposed by almost all private shareholders, save for BulBank, which is headed by Levon Hampartzomian- a banker famous for being on excellent terms with any government?
The thin air of the conspiracy theory thickens when we add the fact that Lubomir Boyadjiev, Executive Director of BenchMark Group was appointed to the board of directors of the BSE: he is a classmate of Simeon Diankov, Borissov’s Minister of Finance. Another person rumored to be close to Dyankov is the new Chairman of the Board of the BSE – Asen Yagodin, Executive Director of Post Bank.
There are, however, some who believe that neither Borissov nor his political party actually have a base of economic supporters and affiliated business that they are obliged to serve. In other words, there are people in Bulgaria who honestly believe that compared to other parties, Borissov’s party, GERB, comes with no strings attached.
This may be a ridiculous notion to some, but no such thing can be said about any of the other political parties: there is an entrenched belief among Bulgarians that political parties exist solely for the purpose of serving the economic interests of their supporters and affiliated business. Many believe that Borissov is doing the same, yet many also believe in giving him the benefit of the doubt. This, in the crass Bulgarian political landscape, marks a step up.
Let us now put the rumors to the side and speculate a bit. One likely scenario is that the government will increase the value of the BSE stock by privatizing large companies via offerings on the stock exchange, then sell its shares to that (supposed) benevolent foreign stock market operator in shining armor; in this way, it would be paving the way for the ascent of Bulgaria’s capital markets, whilst also making a sweet profit for the state coffers from the sale of the government’s shares in the BSE.
Or, the somewhat more gloomy scenario number two: that is, that the government does nothing, and by its inaction deepens the public mistrust in domestic capital markets, so turning the BSE into a tool of state control for the benefit of a monopolist of its choice.
These are only speculations as to what the government will do. Let us wait and see what it does. After all, as the Good Book says, “by their fruits ye shall know them” (Matthew 7:16).
………………………………
*Christian Filipov currently lives in Sofia and is a freelance development consultant working on legal and regulatory reform projects in transition countries. He holds law degrees from the University of Leipzig in Germany and the University of California at Berkeley. Christian has worked as a university researcher, tax consultant and attorney in the United States, as an attorney in Bulgaria, and as a consultant in Bosnia and Herzegovina, Bulgaria and Kyrgyzstan. He has authored several academic publications.
balkan analysis
Δεν υπάρχουν σχόλια:
Δημοσίευση σχολίου