A privatisation programme is expected to act as a catalyst for the regeneration of capital markets and M&A activity in Portugal, restoring confidence in the country’s financial stability
Portugal is currently facing a challenging economic context, as long-standing structural weaknesses and macro-economic imbalances crossed paths with the global financial crisis.
The country has found itself with a chronic government deficit and a growing public debt, aggravated by the difficult financial market conditions and culminating in high funding costs leading to a situation where neither the government, nor the international markets, could provide the necessary incentives for economic growth.
In 2010 the Portuguese government put in place a Stability and Growth Programme for the 2010-2013 period to face the sovereign debt and public deficit issues with several austerity measures. However, the growing difficulties of obtaining the necessary financing led Portugal, in April 2011, to request financial assistance from the International Monetary Fund (IMF), the European Commission (EC) and the European Central Bank (ECB). The assistance comprised a financial package of €78bn in credit, to be disbursed until 2014 but contingent on the achievement of certain goals and the implementation of several structural measures agreed between the parts in the Economic Adjustment Programme, aiming to contribute to a long-term sustainable growth of the Portuguese economy.
One of the measures agreed with the IMF, EC and ECB was the establishment of a goal of €5bn in privatisation proceeds between 2011 and 2014, through the acceleration of the privatisation plan already in progress, including companies in the energy, aviation, transport infrastructure, communications, shipbuilding and financial sectors.
The privatisation programme soon became one of the flagships of public debt reduction, as well as of the adjustment programme itself and with the government putting great effort, not only into the fulfilment of its obligations, but also into working toward beating the goals established by the IMF, EC and ECB.
The balance so far could hardly be better and has certainly beaten expectations: since the revitalisation of the privatisation plan in 2010, the Portuguese state has achieved sale proceeds of around €4bn, including Galp’s €0.9bn exchangeable bonds issue in 2010. The most recent privatisation plan has been focused on the energy sector – namely with the sale of 21.35 percent of EDP (energy generation, distribution and supply), the sale of 40 percent in REN (power grid operator) and, in 2010, the issue of Galp Energia (oil and gas) exchangeable bonds. All operations have been regarded by stakeholders as successful, not only in financial terms but also in terms of transparency, contribution to the companies involved and positive impacts on the Portuguese economy.
Galp Energia’s fifth reprivatisation phase was carried out through the issue of exchangeable bonds due 2017, worth €885m.
Concluded in September 2010, the issue was the largest for an equity-linked product in Portugal since 2007, and the largest non-bank issue in the first nine months of 2010 in EMEA, representing a premium of 25 percent to the market value of Galp Energia shares at that time.
The operation’s high demand exceeded market expectations and was extremely successful from Portugal’s perspective. Not only did Portugal execute the fifth reprivatisation phase of Galp Energia while retaining dividends and voting rights during an additional period of up to seven years, but it was also able to raise more than €885m at a relatively low funding cost during the same period, with a coupon rate of 5.25 percent, more than 35 basis points below the Portuguese seven-year government bond yield.
The two most recent privatisations are EDP’s eighth reprivatisation phase – through the direct sale of a 21.35 percent equity stake (€2.69bn) – and REN’s second reprivatisation phase, via two direct sales totalling 40 percent of the company’s share capital (€592m).
These deals have marked the beginning of the privatisation programme established in the Economic Adjustment Programme, fulfilling, against all expectations, around two thirds of the global goal of €5bn. The structuring of both sale processes has allowed for the maximisation of Portugal’s financial goals, while coping with the highly demanding schedule, lasting just five months. In fact, the financial outcome was remarkable not only in terms of the amount received by the state, but also in terms of the financial and economic contributions to both companies as well as to the Portuguese economy more broadly, included in the investment package proposed by the winning bidders.
Such an outcome was possible due to the ability to structure a global and competitive process, having attracted interest from three different continents, including some of the largest energy companies in the world, such as China Three Gorges (China), E.ON (Germany), Eletrobras (Brazil), Cemig (Brazil), State Grid (China) and from renowned energy funds such as Brookfield and Oman Oil.
The winning bidder in the sale of EDP’s 21.35 percent stake was China Three Gorges, China’s largest clean energy group, for a price of €3.45 per share, representing a 53.6 percent premium over EDP’s pre-transaction market price, and making it the biggest privatisation ever in Portugal. The deal package also included an investment of €2bn in EDP’s renewable energy assets, a firm funding commitment to EDP of another €2bn and a strong commitment in the creation of an R&D centre and the potential establishment of a wind turbine plant in Portugal.
In the case of REN, a solid shareholder structure was built with two new strategic partners, by selling a 25 percent stake to State Grid, the world’s largest utility and operator of the Chinese power grid, and a 15 percent stake to Oman Oil, a sovereign fund that has positioned itself as a long-term financial partner of REN. The success of the operation is evident in the combined 34 percent premium over REN’s pre-transaction market price, in the access to a €1bn credit facility for REN, and in the strategic partnerships signed, which will contribute to the company’s growth and internationalisation strategy.
According to the Portuguese Government, several privatisations are expected to be initiated during 2012, namely in important companies such as TAP (flag carrier airline), Caixa Seguros (insurance and healthcare), CTT (postal services), ANA (airport management), CP Carga (rail freight transport), Águas de Portugal (water distribution) and RTP (television). Since all these companies are currently 100 percent owned by public entities, it is expected that the privatisations may take several different structures, including a combination of public offers, private placements and strategic sales.
The recently completed privatisations have mitigated the fear that Portuguese companies could no longer attract foreign investors in the current economic context. It seems that the solid strategies conducted by Portuguese companies during the last years, together with well-managed M&A and capital markets transactions and the recent positive developments on the Portuguese macro-economic environment, are the necessary ingredients for a successful privatisation programme.
In spite of current investor sentiment over the European peripheral economies such as Portugal, our experience tells us that there is always room for good investment opportunities. Although more selective in uncertain times, investors are always looking for companies with growth potential, and most Portuguese companies have been doing their homework over the past years by focusing on business and geographical risk diversification. More specifically, many Portuguese companies were able to create sustainable growth strategies and can allow investors to gain access to booming Portuguese-speaking economies such as Brazil, Angola and Mozambique.
We strongly believe that the Portuguese Privatisation Programme will present interesting opportunities to investors and that all ingredients are met to allow privatisations to set a new dynamic in the Portuguese economy, which considering the difficult credit market conditions, will be an important catalyst to unlock other operations from the private sector, through the injection of liquidity into companies, the creation of specific business opportunities ancillary to the core privatisation operations, and the increase in investor confidence. An active privatisation programme may be pivotal in unlocking internationalisation strategies, corporate restructuring measures and M&A plans that were just waiting for a sustainable change in the environment.
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