Fall of the shares of Electrica, after the decision to make a deal with the Proprietatea Fund

It seems the stock market did not take kindly to the approval of the transaction by which "Electrica" acquires the stakes of the Proprietatea Fund in its branches, at least for now, because EL stock dropped abruptly, immediately after the general shareholder meeting of October 26th.

Electrica shares yesterday reached 12.34 lei/share, down 4.78% over October 26th and 4.34% below the beginning of October. Also, the BET-NG index of the energy stocks fell 0.83%, from the beginning of last month, while the main BET index fell 1.45%.

Brokerii blame the depreciation of EL on the overall market drop, as well as on the deal with FP.

Adrian Simionescu, CEO Vienna Investment Trust, told us: "The depreciation of EL shares is part of the recent overall market trend. This trend came on one hand due to overall profit-taking, and on the other hand because of the fiscal instability which the Government has promoted and which has induced some worries among investors about the results which might be seen next year, in terms of the stability of companies in the portfolio.

On the other hand, the price at which EL has acquired from The Proprietatea Fund (FP) its stakes is considered by investors very high and unjustified. For that reason, many people have decided to sell shares in the company. From a strategic point of view, it is beneficial for the company that it has acquired those stakes, even though they are minority ones, but the price they have paid is too high compared to what they were worth, which means investors punished it".

In the opinion of Marcel Murgoci, director of operations at Estinvest, the main reason for last week's depreciation of the price of EL is connected to the overall market drop, which also caught the electricity company in it: "That element is more important than the fact that the company has decided to buy from the Proprietatea Fund the holdings in its subsidiaries, because the decision is still in effect and yet, today (ed. note: yesterday), the EL stock rose.

It is clear that a large amount of money will exit the company and investors were probably unhappy, because that could have gone towards dividends, meaning that some of them sold their shares, especially since there were recently elections for the Board of the Company as well. Still, that effect is less important than the generalized drop of the market as a whole".

On October 26th, the shareholders of Electrica approved the acquisition of the entire stake that FP held in the share capital of the branches of EL, for 752,031,841 lei.

The deal will not affect the right to dividends of the Proprietatea Fund for the financial year 2016, as it has already been approved at the level of each branch. The total dividends amount to 97,968,159 lei.

As the price paid is bigger than what Electrica was willing to pay in the previous years, some energy market specialists claimed that the price that was paid now to FP was too high.

In spite of this, the CEO of the company, Cătălin Stancu, as well as the Minister of Energy said that the deal that was approved and completed, on November 1st, is the best one possible for the company.

Cătălin Stancu was asked about the reasons for this deal, last week in the Parliament, in the Investigation Commission for the activity of the ANRE.

He explained that the dividends owed to the Proprietatea Fund are not included in the transaction: "They are rights earned and granted to the shareholders, including to the state, seven months ago, before any decision concerning the transaction was made.

With or without the transaction, all the shareholders, including the Fund, will collect their dividends. The answer is that dividends, technically are not included in the price".

Cătălin Stancu explained that the transaction for the minority stakes was an obligation assumed upon the listing of the company: "At the date of the IPO, there were some obligations to use the capital, which the company had assumed. What is more important is that this a decision of economic opportunity. When you have cash, like Electrica does, and there have been criticisms lately over the good use of that capital, you need to try and use it to produce the highest return. Based on the analyses made with four consultants, the use in the deal with the Proprietatea Fund would give the best return possible given the risk and opportunity conditions we currently have available.

The capital use is not limited only to the transaction with the Fund because at the present time, we are financing all the distribution branches with approximately 150 million Euros for the investment programs".

BURSA recently reported that Electrica was now willing to offer 60 million lei more for the stakes of the Proprietatea Fund in Electrica, compared to the amount it was willing to pay one year ago.

In March 2016, the firm offer of Electrica SA was 790 million lei, while the Proprietatea Fund wanted 875 million lei. According to the talks at the time, Electrica was not willing to grant the Proprietatea Fund the right to receive dividends as well.

Mr. Stancu said that he was not familiar with the details of the negotiations that had been held until last year, because he had only been with Electrica for a year: "With all due respect, I think that this is a comparison that deserves attention. We are comparing a transaction that failed with one that succeeded. Therefore, they can't be compared. This is a complicated negotiation and I don't think anybody would be willing to say that a certain price is the perfect outcome of a negotiation. It is clear that a better result is always possible. At the present time, the maximum profitability came from this transaction and the shareholders' decision was unanimous, with 75% of 75% present. As a result, the shareholders, of which many were investment funds or banks, confirm that such an investment was also the appropriate option for them".

The head of Electrica was asked why he didn't go for the option of a share capital increase at the subsidiaries, to see whether the Proprietatea Fund would come in with money to keep its stakes.

He said that in doing so he ran the risk of a lawsuit from the minority shareholder: "Any loan we extend to our subsidiaries can be converted into a contribution to the share capital. What matters is for the funding to get done. The loan or the contribution to the capital do not differ much in terms of profitability. And to give you a direct answer, there are legal impediments when you start a share capital increase, when you have a minority shareholder, who may not agree to such an operation. Fundamentally, you are asking them to come up with cash to keep their stakes, but there is also the risk that they are going to challenge the operation in court. That risk would have affected the funding of the investments, which is Electrica's main goal at the present time".

The FP-Electrica deal is one of the subjects of the motion of censure by the PNL against Energy minister Toma Petcu.

PNL members said: "The acquisition by Electrica of the 22% block of shares owned by the Proprietatea Fund in its four branches represents a rushed decision which removes the 163 million Euros from the budget of the company, which affects the investments in the system that are so sorely needed.

Through the Ministry of Energy, the Romanian government holds 48.78% of Electrica.