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.