«Introduction and Summary1 Global privatisation proceeds increased dramatically in 1997 to reach US$153.4 billion, which compared to the 1996 figure ...»
Privatisation: Recent Trends
Introduction and Summary1
Global privatisation proceeds increased dramatically in 1997 to reach
US$153.4 billion, which compared to the 1996 figure of US$98.4 billion,
representing a 55 per cent increase. OECD economies still account for the
majority of the proceeds or 64 per cent of the total. Privatisation transactions
in the OECD area raised US$98.5 billion in 1997 or some 40 per cent more
than in 1996, which was itself a record breaking year. An even more robust trend has been developing in non-OECD economies; the volume of privatisation proceeds doubled in 1997 to reach US$55 billion, compared to US$27.9 during the previous year (see Table 1).
Data from the past year confirms the predominant role of public offerings as the preferred privatisation method in OECD economies. In contrast, most non-OECD countries, for a second consecutive year, have raised most of their funds from privatisation through trade sales to strategic investors.
The participation of domestic investors in OECD privatisation programmes continued to grow, whereas the role of foreign investors has remained significant, though relatively less important. In the OECD area, the changing attitude of the population at large towards equity investments and the emerging “shareholder” culture have led to an increasing role of retail investors in OECD privatisation-related public offerings. Overall, the distribution of shares at primary offerings remains roughly balanced between retail and institutional investors, while the latter are likely to be much more important in secondary offerings.
As regards future trends, of most governments with privatisation programmes have announced ambitious privatisation targets. On the face of it, this could be another record breaking year. However, the Asian financial crisis remains an important mitigating factor of potentially serious proportions. Asia itself was not expected to generate an important percentage of privatisation transactions in 1998 (with the possible exception of China). But the negative effect of the crisis in other emerging markets can already be felt; important transactions have been cancelled in Russia and Brazil in the first half of the year.
This review of privatisation trends relies on quantitative information, drawn mainly from the recently established OECD Privatisation Database.
Privatisation in 1997 Selected OECD Member countries The Italian privatisation programme has been one of the largest and most constant through the last four years. Leading the way in 1997 was the sale of nearly 45 per cent of Telecom Italia (formerly Stet), which raised US$14.9 billion and was the largest privatisation transaction of the year. The offering of the third tranche of the oil and gas giant ENI was the third largest offer in the world for 1997. Approximately 17.6 percent of the shares raised L13.3 trillion (US$7.8 billion) and reduced the state share to 51.5 per cent. The next tranche, scheduled for 1998, is expected to bring the state share down further to 39 per cent.
The commitment of the Spanish government to broader and deeper privatisation was continued during its second year in office. Compared to the previous year, in 1997 Spain registered an impressive increase of proceeds to reach US$12.5 billion. The US$4.4 billion offer of Telefonica was nearly three times larger than the third tranche of the gas company Repsol, the previous record Spanish privatisation. The offer attracted over 1.2 million buyers and ranked seventh among the ten largest deals in 1997. Nevertheless, the largest sale of the year by Spain was the secondary offering of the power company Endesa, amounting to US$4.5 billion. Finally, at the end of the year, the public offer of approximately 59 per cent of the Spanish steel maker Aceralia raised
341.6 billion pesetas (US$2.27 billion), in what was the largest transaction in the manufacturing sector in the OECD area.
Notwithstanding delays in privatisation transactions following the June 1 elections, French privatisation proceeds in 1997 reached US$7.8 billion from US$5.1 billion in 1996. Approximately 21 per cent of the capital of France Telecom, the fourth largest telecom operator in the world, was sold in October 1997. Over 200 million shares have been sold in retail and institutional tranches, of which roughly 105.5 million shares have been allocated to French retail investors. Total proceeds of FF 42 billion (US$7.1 billion) have been raised in the initial public offering (IPO), making the transaction France’s largest public offering to date. In addition, France Telecom has now more than 3.9 million shareholders, more than any other European telecommunications company. While the sale of France Telecom has proceeded, the long running sale of defence electronics company ThompsonCSF, as well as the sale of up to 47 per cent of Air France, both were postponed.
The largest ever privatisation in Portugal was the IPO of 30 per cent of Electricidade de Portugal, which was held in June 1997 and raised approximately Esc391 billion (US$2.3 billion). The book-building method was used in order to achieve a more flexible pricing of the shares offered for privatisation; the shares were listed on the Lisbon Bolsa and abroad. The third tranche of Portugal Telecom was also very successful and totalled US$2 billion.
The second largest privatisation since Deutsche Telecom in Germany was the sale of the state stake in Lufthansa, amounting to 37.45 per cent of the shares. A total of US$2.7 billion were raised on the domestic and international markets. The offer enjoyed high demand as a result of the dramatically improved financial performance of the airline through 1997.
With US$16.8 billion last year, Australia almost doubled its privatisation proceeds from 1996. Nearly two-thirds of these proceeds were raised from the IPO of 33.3 per cent of the national telecom operator Telstra for A$14.3 billion (US$10.9 billion). This transaction was the second largest in 1997 after Telecom Italia and among the ten biggest privatisations ever.
Telstra was aimed at local investors, of which institutions acquired 21 per cent of the offer and retail investors 60 per cent. The purchase of Australia’s Loy Yang A power station by the Horizon Energy consortium for US$3.8 billion, was among the largest sales in the energy sector in 1997.
The largest Japanese privatisation in 1997 was the sale of JR Tokai (the Central Japan Railway Company), which operates the “bullet train service” from Tokyo to Osaka. This transaction, the largest in Asia, was completed on 8 October, just before the financial market crisis. It was the third rail privatisation of Japan and it raised ¥485.9 billion (US$4 billion approximately).
The offer was targeted to institutional and retail investors; the latter purchased approximately 90 per cent of the shares allotted to them. The state holding company JNR will retain the shares left unsold to individual investors plus a residual share of approximately 35 per cent of the shares.
Selected Non-OECD countries
Privatisation proceeds in Latin America reportedly reached US$27.5 billion, of which the major part was generated in Brazil. The country’s privatisation programme, initiated in the early 1990s, has entered its second stage, which includes the sale of large state-owned companies and the award of concessions in various areas of infrastructure. The 1997 proceeds totalled over US$17 billion, amounting to 60 per cent of the recorded privatisation proceeds in the region. The majority of these proceeds came from the power sector; the largest sale was that of São Paulo utility CPFL for US$2.7 billion. It is worth noting that investors in the Brazilian power sector were prepared to pay large premia over base prices, which in the case of Energipe reached 97 per cent. The largest Brazilian transaction in 1997 -- the sale of a 41.7 per cent stake in the mining giant Compania Vale do Rio Doce(CVRD) -- totalled US$3.15 billion. Large privatisation transactions also took place in Argentina, Colombia, and Venezuela, respectively with the sale of the postal firm Encotesa for US$3.1 billion, EEB Condesa Emgesa for US$2.2 billion and the steel company Sidor for US$1.2 billion.
Privatisation in Asia has suffered in the wake of the 1997 financial crisis, which resulted in delayed transactions or reduced privatisation proceeds.
These negative trends might be expected to continue in 1998. Despite the market turmoil, however, certain transactions from the region succeeded in raising significant proceeds. China Telecom was one of the major listings in the area; it raised US$3.9 billion. The share price was affected by the serious fall of the Hong Kong stock exchange index, which occurred on the same day the shares were listed. Major transactions also have been prepared in Taiwan, including sales of insurance companies and the so called "Big Three" banks.
The first of these, the sale of Chiao Tung Bank, was completed in 1997 and raised US$1.1 billion.
Large privatisation transactions in Russia raised an estimated US$3.2 billion. The most important transaction was the sale of 25 per cent of the telecom operator Svyazinvest, which was bought by a group led by the local Unexim bank for US$1.8 billion. However, the largest sale reported in transition economies was the privatisation of the Kazakhi Oil Company Aktyubinskneft for US$4 billion.
Privatisation activity in Africa was relatively subdued in 1997. In South Africa, the government's commitment to privatisation resulted in a number of deals. The largest was the sale of approximately 30 per cent of the national telecom operator, Telkom, for proceeds totalling US$1.3 billion.
Ttrends and prospects In light of the plans currently reported by governments, privatisation proceeds in 1998 are expected to be significant. Among the major factors that could result in lesser amounts being raised are changes in governments’ priorities, delays in the preparation of transactions and, most importantly, market conditions. The Asian financial turmoil has already rendered most emerging markets considerably volatile. In certain cases, in Asia and elsewhere, it has caused severe and prolonged drops in share values.
Repercussions from the crisis are beginning to be felt by large corporations, banks and financial intermediaries in the OECD area, who have credit exposures to Asian concerns or other significant business dealings. Should the situation worsen, the incentive for governments, companies and their financial advisors/underwriters to bring transactions to the market could weaken, directly affecting OECD privatisation programmes.
In the absence of significant market disruptions in the year ahead, telecommunications, electricity and banking are expected to account for the largest amount of proceeds. OECD privatisation activity in 1998 is expected to be dominated by the sale of the Italian electricity giant ENEL. Proceeds from this privatisation could reach US$15.6 billion. Together with the fourth tranche of ENI, other major privatisations expected to come to market include Alitalia, the institutional offering of the country’s fifth largest bank in terms of deposits (Banca Nazionale del Lavoro), and Aeroporti di Roma. Spain, which is also planning a large privatisation programme for 1998, completed a major public offering of over 29 per cent of the shares of Argentaria Bank in February, which raised US$2.4 billion, surpassing by almost a half billion dollars the initial optimistic projections. The IPO of up to 75 per cent of Germany's Postbank is expected to raise some US$1.8 billion, while additional bank privatisation transactions are also on the agenda for 1998. Future privatisation plans for Deutsche Telecom (DT) have taken an important turn with the decision to exchange 7.5 per cent of its shares with France Telecom.
No public offerings of DT shares are expected in 1998 and 1999. Another important telecom transaction in Europe, the sale of 42 per cent of Tele Danmark to the US company Ameritech for US$3.2 billion, was completed in January 1998.
In 1998 the French government is expected to dispose of up to 47 per cent of its shares in Air France. The sale of 67 per cent of the French bank CIC for US$1.6 billion took place in May 1997 and will be followed by that of its parent, GAN insurance company. At the beginning of 1998,
7.7 million shares (the balance from an earlier 1995 privatisation) of Pechiney, the aluminium and packaging group, were sold for FF 2.3 billion (US$371 million). However, half of the shares will remain in public hands, as they were sold to Electricité de France and the nuclear fuel firm Cogema. The troubled state bank Crédit Lyonnais is to be privatised by 1999, following an agreement between the European Commission and the French government.
The Australian government forecasts sales proceeds of A$15 billion (US$10.5 billion) over the next two years. New assets for sale will likely include Australian Multimedia Enterprise, Australian Defence Industries, broadcasting transmission networks, and commercial property. The government’s programme for concessions over the operation of the country’s airports has been continued in 1998. In Korea, notwithstanding the ongoing crisis, the government is planning to go ahead with an important privatisation programme in 1998-1999, that will include a secondary offering for Korean Telecom, with expected proceeds of up to US$1.2 billion. Other planned privatisations include the Korean Development Bank and 35 per cent of Pohang Iron and Steel, the world’s second largest steelmaker.