Privatising Properly 2

7^th April 2006
The Malta Independent - Friday Wisdom

Private shareholders in Maltacom had the shock of their life this week when it was disclosed that the best binding offer in the privatisation of Maltacom values each share at Lm1.51c0 being a 30% discount to the last price of Lm2.15c0 on the Malta Stock Exchange before the announcement was made. After the announcement and up to time of writing the shares have not traded as there were no buyers for a price within the 7% price fluctuation band allowed by the Exchange. It is however sensible to assume that once normal trading resumes the price will drive down to within a reasonable range of the best offer price in the privatisation process.

Private investors would normally expect that whoever is buying a controlling stake in a dominant Company like Maltacom ought to pay a premium rather than expect a substantial discount. However this is on the assumption that the market price was realistically valuing the Company in the pre-privatisation stage.

The market bulls argue that the Maltacom price of Lm2.15c0 was a fair price in that it was way below the all time 2000 price record of Lm3.28c0 whereas the Malta Stock Exchange Index is way way past its 2000 peak before the market collapsed until 2003 since when it started to recover gradually and recently not so gradually.

On the other hand the market bears argue that taking international financial ratios for the telecom sector, a competitive price for Maltacom is close to Lm1.50c0 and therefore the market was showing irrational exuberance when it carried the Maltacom price to over Lm2.

True. there is no guarantee that the market price is a fair reflection of the underlying value of the share in question and there is no doubt that a privatisation bidder will pitch the price to the underlying value plus a margin for efficiency gains which may be possible post-privatisation.

In fact in my contribution of 24^th February 2006 I had indicated that the Maltese equities were being priced on the market on a momentum basis rather than for their underlying value and had stated:

There is nothing wrong in being a momentum investor, provided one knows what one is doing. Whoever chooses such an investment strategy must however realise that if it is too good to be true, then it is generally not true, and when the whole process would have run its course, there will be winners and losers – but the sum of the parts will be the same. Such investors have to make sure that they leave the party when the champagne is still flowing – as, the moment the champagne stops, there will only be tears for the road.

 

It seems that the party champagne has stopped flowing for Maltacom shareholders sooner than many expected. But what is puzzling is that other big caps in the financial services sector have been growing on momentum rather than value on terms, which eclipse Maltacom’s record. Could this be the pin that pricks the over-inflated balloon or will the damage be restricted to Maltacom?

I cannot help feeling that the undue secrecy of the bidding process has forced various shareholders to make decisions in the dark when the process could have been handled more transparently to avoid undue speculation in the market. In my contribution of 17^th February 2006 I had appealed that:

“in the interest of financial transparency, serious consideration should be given to making the price setting process fully visible by means of bids opened in public or in a beauty contest type of bidding.

In this way, not only will the public be satisfied that the privatisation process is due and proper, but the investing public would not need to stay second guessing where the privatisation price is heading in making its decisions whether to buy, sell or hold Maltacom shares”

On the 12^th February 2006 a front page article in the Malta Independent on Sunday had stated that

“it is generally thought the share price (of Maltacom) at the beginning of the privatisation process (Lm 1.39) was a ‘fair price’… (but) the present price (Lm2.20) does not reflect the real worth of the company”. The article goes on to quote an unidentified source, which states that although “Maltacom made significant progress in curbing expenditure and re-structuring its efficiencies, it has invariably not registered any major or strategic breakthrough which can justify such dramatic increase in its share price”

I find this quoting unidentified source more than a bit unorthodox and to my mind goes against the letter and spirit of the stipulations of the Prevention of Market Abuse Act 2005, which came into effect last year. This places on journalists the obligation to be prudent when expressing opinions on market valuations and to disclose clearly their source and ensure that it is qualified and licensed to express such opinions. Quoting unidentified sources could lead to hidden agendas that could involve market abuse, especially in the process of privatisation where bidders have every interest to acquire Maltacom on the cheap to the detriment of government and the nation at large.

Events of this week seem to indicate that the unidentified source wanted to tell the public something which should have been said in an official and transparent manner by making the bidding process public.

But there is more to this than the fortunes of private investors in Maltacom. There is the wider issue of whether the government is getting fair value for its 60% holding in Maltacom. Arguments that the best bid price is in line with international financial ratios cut no ice with me. When selling a controlling stake in a dominant company with ample room for driving efficiency gains the price ought to reflect a substantial premium on international ratios. Given the stability of Maltacom’s profits and its potential for growth in mobile, data and cable services I would have expected something much better.

At the end of it, if Maltese investors were prepared to pay a higher price than the strategic partner the government could have chosen the IPO route rather than a trade sale. And then one should question whether this is the right time to sell a telecom company. Telecoms have substantially under-performed the rest of the investment market during 2005 and probably this is negatively influencing the projected privatisation price. There must be a better time to privatise Maltacom.