Wednesday, 22 December 1999

A Faulty Comparison

The Times of Malta

The evening sitting of last Friday 17th December 1999 parliament was bound to be historic. It was the last sitting of the year, the century and the millenium. It therefore had to have some content which was fitting for` the occasion.

At the end of a long budget debate it was difficult to find something which had not already been said. The Leader of the Opposition for the umpteenth time criticised the Prime Minister for the way the sale of Mid-Med Bank was handled making the point that the government blew away some Lm51 million for having sold cheaply to HSBC. In making such calculations the Leader of the Opposition was basing himself on a share price of Lm5 as against the privatisation price of Lm2.90 concluded last June.

Quite rightly the Dr Sant did not re-calculate the loss based on a share price approaching the Lm7 as it is fair now to state that beyond the Lm5 mark the share price is enjoying the HSBC endowment benefit as the price earnings ratio of the former Mid-Med Bank will approach that of` its parent bank.` Had he made such recalculation the loss would have been much more than Lm51 million but this would not have been fair.

The Prime Minister was really in tight situation to defend himself from this criticism. He is responsible for the infamous quote of Lm10 million here and Lm10 million there make little difference. He is responsible for the strange situation where he authorised the Minister of Finance to publicly announce the deal before seeking cabinet approval.` Just imagine what freedom cabinet really had to oppose the deal which the Prime Minister had authorised the Minister of Finance to announce it to the press as a done deal. No wonder a deal of this importance was endorsed by cabinet in just one sitting of a few hours on the basis of` documents ( later published in the Public Accounts Committee) which give scant realistic analysis for approving the deal.

Right then the Prime Minister defended himself with a faulty comparison of millennial proportions. He retorted that by Dr Sant`s same reasoning one could argue that` Dr Sant`s Labour government lost` Lm51 million by selling 40% of Maltacom at 90 cents per share in June 1998 when its current price is some Lm2.50.

Having been directly involved in the Maltacom`s privatisation and as a vociferous critic of how the privatisation of Mid-Med was conducted I must explain why the Prime Minister`s argument and comparison does not hold.

Unlike Mid-Med`s sale Maltacom floatation was an Initial Public Offering (IPO). It was conducted not against an established trading performance as in the case of Mid-Med. The trading performance of Maltacom`s predecessor (Telemalta) was anything but impressive. Maltacom was sold merely on prospects and against a valuation of such prospects conducted by three international names ( two banks and one consulting` firm) separately. No serious independent valuations were procured in the case of Mid-Med Bank`s sale.

The acid test is however the after market. Normally a six-month period is attached by international standards during which the equity is expected to trade within a reasonable range from the issue price in order to give satisfaction that the issue price was fair. What happens beyond six-months is uncontrollable and depends on a myriad of events beyond anybody`s control.

In case of Maltacom` six months after the IPO the trading price was less than the issue price. If anything criticism at the time in stockbrokers` circles was that Maltacom was over-priced at the issue stage. It took 9 months for Maltacom`s market price to reach the issue price and only after Maltacom started announcing interim operating results surpassing the projected figures. By contrast six months after Mid-Med Bank`s sale the market price was` more or less double the contract price without any post privatisation operating results having yet been published.

Another important difference between Maltacom`s IPO and Mid-Med`s fire-sale is that the Government still has 60% of Maltacom whereas in case of Mid-Med it has sold the lot at one go. By floating 40% on the market the Government has not only cashed in handsomely beyond anyone`s expectations at the time, but has also seen the holdings of its remaining 60% enhance tremendously in their value thus shaping nicely for the next bout of privatisation. In case of Mid-Med the government has benefited nothing from the after market growth giving away a handsome present to the buyer. I should think that the 30% private shareholders are grateful to people like yours truly who defended their right not to be constrained to sell against their wish below market rates.

Such faulty comparison shows why Malta has received such a raw deal from Mid-Med privatisation. It was handled by people who have little knowledge of what they are talking about.

Wednesday, 15 December 1999

Misplaced Euphoria

The Times of Malta

The Helsinki announcement that formal negotiations would be started with Malta early in the year 2000 has apparently given the government a boost to its low spirits. The boost has verged on euphoria. It is misplaced for two main reasons.

Firstly all applicants have been so invited. Even Turkey who so far fails to satisfy the democratic credentials for membership has been given a conditional green light to start negotiations. In all no less than 12 countries have been put in the negotiating phase.

Secondly this was all so predictable. In my recent publication `MALTA`S RELATIONS WITH THE EU ` A Realistic Way Forward` which I had penned last August I had written ` Malta`s application for membership is probably being pushed to be promoted to the first wave of new applicants (the ins) joining Poland, Hungary Czech Republic, Slovenia, Estonia and Cyprus as the countries being actively considered for the next enlargement. This possibly will be decided in December 1999 at the Helsinki Summit of the EU Heads of Government.`

As it so happened Helsinki promoted all applicants. How could Malta be excluded`

So what we should be debating, rather than celebrating, is not the foregone conclusion that Malta would be invited to start active negotiations following the ending of the screening process, but what exactly shall we be negotiating.

How can the government expect to be taken seriously if it has not even appointed its chief negotiator How can the government expect to carry the support of a wide spectrum of Maltese society if it has not delineated what is acceptable, what is negotiable and what is not negotiable.

Some pointed questions will make it clearer. What is Malta`s target accession date` Is it before or after the next election` If before, is Malta ready to accept the entire aquis communitaire in so far as the single market is concerned` Is Malta prepared to accept the starting point being put by the EU that on the single market there will be no derogations and any extended transition phases are to be minimal and short` Are we ready for the full consequences of liberalisation of all monopolies, even natural ones, freedom of movement of goods, services, people and capital`

It is clear that this can only be achieved before next elections at a huge cost in terms of unemployment, which will inevitably mean that support for joining the EU will wane right when most needed, i.e. when the question is put to the electorate in a referendum.

That the EU is wary of this possibility is stating the obvious. In private discussions and in public pronouncements the EU expresses its concern about the fact that Malta is the only applicant country where the support for membership is not only deficient among the population at large, but also among its political class.

The EU clearly sees great benefit for it to have Malta included as a full member but is wary of running the risk of having Malta playing a Norway on it. Hence the pressure which is almost unethically being built on the MLP to reconsider softening its position against membership for the foreseeable future(1).

Such pressure will do more harm than good.` Unlike all other applicant countries Malta does not have compelling political reasons for joining the EU. On the contrary through membership Malta runs the unappetising prospect of seeing its disproportionate political importance being totally neutralised by new decision making rules.` These are the rules which the EU still has to agree upon in the next Inter-Governmental Conference (ICG) of 2000 but which will certainly take away the right of veto from new members.

How could the MLP be expected to soften its position if the EU and Government do not make unequivocal declarations that Malta`s constitutionally enshrined neutrality and non-alignment will be respected and Malta will be allowed to opt out of all institutional arrangements which may infringe such provisions, including the Common Foreign and Security Policy How could the MLP be expected to change its views if the prospect is for Malta as an EU member to have its political importance relegated from that of a sovereign state to one comparable to a` medium sized city in Europe.

Next year`s ICG will prove than in trying to achieve the simultaneous objective of widening and deepening the EU is trying to square a circle. Eventually concessions will have to be made to allowed the concept of variable geometry to prevail in order to allow countries like Malta the option of limited membership. Otherwise accession of some countries, Malta included, would have to be considered as a very long term objective.

Until this happens chasing EU membership without political consensus is destined to a still birth. Until this happens Malta should be using its energies to re-structure its economy and build on existing consensus outside the membership option.

Wednesday, 10 November 1999

Mid-Med Share Price - Then and Now

The Times of Malta

I crave for` the opportunity to prove myself.` If HSBC and Government undo the deal and I were to be given a brief to sell the 67.1% block of shares, provided I am allowed 6 months and an expense` budget of` between 3% and 4% of the sale proceeds I am confident of a minimum price of Lm 4.50, a probable price of Lm5 and a possible price of Lm5.50per share.` It was done for Maltacom and it can be done again for Mid-Med.`

When I wrote the above in the last week of April 1999 ( in a series of articles on the MMB sale to HSBC later published in The Times) I was putting myself on the line. But I was sure it could be done by proper marketing on the international market.` However I never had high hopes that the base figure of` Lm4.50 would be reached bang on 6 months later through the modest Malta Stock Exchange` medium alone.

Clearly I am fully justified if I claim I told you so.` I still look forward to reaching the other price levels set in my above quoted excerpt. But what`s important is not whether I told so or not. What`s important is that Government blew away some Lm30 million through the slipshod and hurried way in which Mid-Med was privatised.

And Lm30 million is taking the effective share transfer price as Lm3.40 and not Lm2.90 as otherwise one would have to load on another write-off of Lm12 million. Personally I still harbour doubts that through the way the contract is written,` HSBC can knock off the Lm12 million, only payable in June 2000, `the terminal benefits it is paying to employees for early retirement.

What`s important also is that through collective protection the 30% minority shareholders have stuck out for their rights and saw the market finally coming round to price Mid-Med shares nearer their true worth. In the process making minority shareholders richer by some Lm17 million benchmarked against the Lm2.90` price at which HSBC offered to buy their shares.

I would have stayed quiet and let facts speak for themselves had not the Prime Minister in a Xarabank show tried to twist these clear facts to protect his administration from accusations of mal-administration. In any other EU country the mal-administration on this scale would have demanded the resignation of anyone responsible for its concoction.

The Prime Minister argued that the Mid-Med share price went up so high only because of the involvement of HSBC which has brought in new confidence in the bank`s ability to perform well. Without in any way showing any disrespect to the ability of Mid-Med new owners to manage the Bank in the most professional and efficient manner, there is ample proof that the explosion in share price of Mid-Med is related to the quick education of the market in recognising the true worth of the shares.

Something which unfortunately the government failed to do in the fire-sale of Mid-Med Bank at a mere 7% premium over its last quoted` price prior to the suspension of trading last April.

At the point of suspension the variance between the price of Mid-Med Bank and Bank of Valletta was not much less than what it is today. This means that Bank of Valletta`s share price has more or less followed the same tracks as that of Mid-Med Bank. Had` Mid-Med Bank share price hike been caused by the HSBC factor,` than one would have expected the differential in share price between MMB and BoV to widen substantially in favour of MMB. Indeed one would have expected the BoV share price to come under pressure in the knowledge that their performance will be depressed by the arrival of a global formidable competitor.

Yet BoV share price still commands the same price/earnings ratio as that of MMB which by international standards is still low allowing ample room for further advancement of their share price.

The other illogical` justification for the dismal price obtained by the government as given by the Prime Minister in his Xarabank show was that ,as Chairman of the Bank in November last year, I had offered to buy back the shares at a price of just over Lm2.

All business schools from Micawber to Harvard will teach the simple truism that to make a profit one has to buy low and sell high. How can the fact that I had offered to buy low (but above the then market price) be any justification for anyone to sell low I and many others like me would never have criticised the government for buying at a good bargain price. Certainly I do not criticise HSBC for seeing a bargain and grabbing it when it is offered. HSBC total investment of Lm82 million of which they have so far paid Lm35 million has already given them returns of Lm42 million in the space of` 4 months odd. On a rate of return basis it is probably the most profitable investment HSBC have ever made.

My criticism is for selling low.` If government can`t understand that or expects all good citizens to stay mum while it prepares the next wave of taxes and expenditure cuts,` then rather than aspiring to join the EU we should be good candidates to join a sub-saharan economic union.

Alfred Mifsud