Analysis: Greek nightmare makes poor ad for asset sales

Reuters News
Posted: Mar 27, 2012 3:28 AM
Analysis: Greek nightmare makes poor ad for asset sales

By Kylie MacLellan

LONDON (Reuters) - Greece's wretched experience has been a poor advert for asset sales as a tool to cut state borrowings, but others in the euro zone high debt club are much better placed to make a decent fist of privatizations.

Italy, Spain and Ireland, all of which are grappling with towering debt burdens, have the luxury of time, at least relative to Greece, and can structure privatization deals to maximize their impact and bide their time on pricing.

And though all of these countries have felt the heat from the markets, Greece has become almost synonymous with the deep crisis at the heart of the euro zone, which has hollowed out its appeal to investors.

"It is not clear Greece has the luxury of doing anything in an optimal way; they are basically burning the furniture just to get by," Bill Megginson, Professor of Finance at the University of Oklahoma, told Reuters.

"But other countries, especially where the crisis seems to have abated a bit, like Italy and Spain, they could and they probably will."

Greece came up with plans for asset sales to convince its lenders it was serious about reforming its uncompetitive economy and also to raise funds to pay down its debt mountain.

But the EU and IMF, which pushed Greece for bolder and more detailed plans as to how it would deliver on its promises, have become increasingly frustrated with the country's repeated failure to meet targets.

Despite a reluctance to sell assets in such poor market conditions, Greece - which aims to raise 19 billion euros ($25 billion) from privatizations by 2015 - has begun ramping up its efforts, including inviting bids for state-owned natural gas company DEPA and the management rights to its Olympic broadcasting complex.

It plans to put stakes in betting monopoly OPAP and refiner Hellenic Petroleum up for sale by May, Greece's chief privatization official said.

But its tight timeframe and ambitious targets, already scaled back from 50 billion euros, suggest it will struggle to meet its price expectations.

"There is a big risk ... the long-term strategy for the businesses and getting a fair price for the taxpayer falls by the wayside," said David Parker, Emeritus Professor of Privatization and Regulation at the Cranfield School of Management. "We are certainly going to have a risk that the government sells off industries without really thinking about the long-term implications."


Countries with the time to get state-owned companies in better shape before selling them, with good management and improving profitability, will get better prices.

Ireland plans to raise 3 billion euros from the sale of state-owned assets, including the energy business of its Bord Gais utility. But while it also agreed to the sales as part of its EU/IMF bailout, it is not under a strict timetable and has said it won't be pushed into fire sales.

Spain has already delayed the privatizations of state lottery Loterias and the country's two biggest airports due to the economic climate.

"It is a balance; do you be opportunistic in terms of picking up offers, or do you actually have a considered plan that will give you a few years to figure out how you increase the value of the organization before you sell it off?" said James Close, head of transaction and advisory services to government at Ernst & Young.

"Ireland certainly seem to be shifting the governance model for their state-owned enterprises so they are looking at increasing the value of them before they potentially sell them."

Italy has yet to set out specific plans for sales, but Prime Minister Mario Monti has called for the privatization of local public services. The head of Italy's main employers' organization has also said the government should look at sales such as trimming its stake in energy company Eni to help soften spending cuts.

Structuring sales right is key to boosting the amount they raise, with the best prices typically achieved either through a public offering or by selling in a series of tranches - both of which take a lot longer than the straight auctions Greece has planned.

"If you sell them in pieces, the first piece may be somewhat underpriced, but then as the firm improves performance you sell the remaining tranches at progressively higher prices," said Megginson, who was a member of the Italian government's global advisory committee on privatization from 2002 to 2007.

When the British government privatized telecoms firm BT, it sold in three waves over a nine-year period. While it received 1.30 pounds per share in the first sale in 1984, this had increased to 3.35 pounds by the second in 1991, and 4.10 for the final tranche in 1993.


The uncertainty surrounding Greece and its economic prospects means it faces an uphill battle to attract buyers.

Private equity firms still see some attractive opportunities in Italy and Spain, particularly firms with international operations, but interest in Greece is limited, said Jeremy Golding, founder of Golding Capital, a German fund-of-funds manager with 2 billion euros of assets under management.

"I don't expect a gold rush of private equity at the privatizations in Greece. It will be a cherry-picking," he said.

Others considering privatizations can also take comfort in demand from sovereign wealth funds and Asian state-owned companies, which the University of Oklahoma's Megginson predicts are likely to buy tens of billions of euros of European assets.

Portugal has already raised 60 percent of its 5 billion euro privatization target from selling 40 percent of power grid operator REN to China State Grid and Oman Oil, and a 21 percent stake in utility EDP to state-owned China Three Gorges.

Selling an asset cheaply also means the government gives up future revenues for less than they're worth, ultimately harming its ability to manage its debt, said Paolo Manasse, Professor of Economics at the University of Bologna.

Greece, which the EU/IMF predicts will have a debt burden of around 327 billion euros by the end of this year, would be better off focusing on more effective ways to bring in money, like curbing widespread tax evasion, said Manasse.

Having more time also allows the state to set up the right regulatory regimes before selling certain assets. Rushing ahead risks transferring unchecked monopoly power to private individuals or companies, with potentially long-term damage to the economy.

"Privatization ... can significantly increase efficiency and quality of service and reduce prices ... but the industry needs to be appropriately restructured to maximize the benefits," said Stephen Littlechild, a Fellow in Privatization, Regulation and Competition at Cambridge University's Judge Business School.

In sectors such as energy, for example, this includes putting transmission, distribution and generation in separate ownership.

Ignoring the need to put appropriate regulation in place from the start could also cause problems further down the line.

"A change in policy after initial privatization could be financially damaging (for the companies)," he added.

($1 = 0.7579 euros)

(Additional reporting by Philipp Halstrick in Frankfurt; Editing by Will Waterman)