English
"The beginning of the end" for the "Proprietatea Fund", like many call it, was started by the request of the American fund "Elliott Associates", the largest shareholder of the Proprietatea Fund, to increase the "compensation" of manager Franklin Templeton, if the latter accelerates the sale of the Fund's interests in various companies.
Leaving aside the uncertain situation of Franklin Templeton as manager of the Proprietatea Fund, since the court of Bucharest annulled the decision of the shareholders appointing it on that position, the shareholders seem to consider that selling the Fund piece by piece, they would make more than by holding its stock.
At any rate, this seems to be the case of the companies listed in the portfolio, under the current market conditions.
The companies in the portfolio of the Proprietatea Fund (ed. note: considered liquid, on December 31st, 2010) are worth 2.8 billion lei (ed. note: at Wednesday's market value, or, in some cases, at the last trading price). Taking into consideration the price of the shares of the Proprietatea Fund, their quota in the total portfolio of the Fund, of approximately 32% amounts only to 2.3 billion lei.
Of course, the amounts can vary considerably, based on several factors - market context, the interference of the other offers conducted by the state, the liquidized blocks of shares - but that is precisely the reason that "Elliott" proposes the increase of the management fee.
Shares of the Proprietatea Fund yesterday rose 1.15%, to 0.53 lei/unit.
• Victor Cionga: The Americans' approach feels exotic in the Romanian context
"Investors buy stock to turn out a profit", Victor Cionga, Managing Partner at AZ Capital Advisors, said, commenting on the announcement made by "Elliott". However, he declined any competence when it comes to discussing any legal aspect which might have implications on the request of the hedge fund.
Victor Cionga continued: "In some cases, after an adequate analysis which involves a careful evaluation of the assets, they could come to the conclusion that liquidating the company in which they own stock and sharing the net proceeds of the sales among the shareholders is the best way to maximize profit. This approach can work very well even in the case of a company like the Proprietatea Fund. The commotion caused on the Romanian market by the announcement of the plan of Elliott Management is made all the more greater by the following factors: (i) the Proprietatea Fund is one of the stars of the domestic capital market; (ii) we have never had such a precedent on the local market; hence the approach of the Americans feels exotic in the Romanian context, but it is something relatively common on other, more mature markets, in particular in the United States. Elliott Management is one of the oldest hedge fund management firms and has the reputation of a shareholder which becomes extremely active when necessary. It is most likely that it has run the numbers and it has come to the conclusion that the parts are worth more than the whole.
If the General Shareholder Meeting approves the proposal made by Elliott Management, it will most likely ask Templeton to present an adequate strategy for this decision. This strategy, which focuses on maximizing the money earned by selling the listed and unlisted companies, would also include a schedule; I doubt that such a document could be ready any earlier than one or two months after the registration of the General Shareholder Meeting at the Trade Registry. Let's not forget for a moment that the markets are currently very volatile; the execution of the sale strategy will take this fact into account.
In the short term, the price of the shares of the Proprietatea Fund will increase, but I don't think we can make any predictions as to how much".
As to what concerns the effect of this announcement on the intended sales of shares to be conducted by the government on the stock market, Victor Cionga considers that they will be positive (if the General Shareholder Meeting of the Proprietatea Fund approves the proposal of Elliott). "The «free float» of certain companies which are interesting for investors will increase; for example, if Romgaz will be listed, then it's free float will be of 30%, instead of 15%", Mr. Cionga explained. "Obviously, it could happen that the price of the listing will be negatively affected if Templeton doesn't sign a «lock-up» agreement for at least six months after the listing (ed. note: agreeing not to sell its shares); but I believe that the interest of Templeton will be to raise the company's value, not to rush and sell immediately after the listing; regardless of what the General Shareholder Meeting summoned at the request of Elliott Management decides".
In the opinion of Mr. Cionga, some of the immediate consequences of the General Shareholder Meeting accepting the request of Elliott will be: (i) the need to solve the legal dispute between lawyer Sfîrăială and the Proprietatea Fund within a reasonable time frame; (ii) the abandoning of the plan to get the Proprietatea Fund on the Warsaw Stock Exchange.
Mr. Cionga said that he made the above comments starting from the premise that the requests of Elliott were made according to the Romanian legislation.
• Nicolae Gherguş, Confident Invest: The offers of the Proprietatea Fund and those of the Government may step on each other's toes
The funds of Paul Singer (ed. note: the head of "Elliott") frequently behave like buyout funds (ed. note: investment funds that acquire companies, restructure them and then sell them) focused on distressed securities (ed. note: companies which are facing temporary financial difficulties; the Proprietatea Fund is part of a market affected by financial uncertainty), and this is not necessarily a bad thing for those who invest with them, in other words for the shareholders of the Proprietatea Fund, considers Nicolae Gherguş, the president of brokerage firm Confident Invest. He said that giving the manager of the Proprietatea Fund a bonus for the quick sale of some stakes is reasonable, but in his opinion some conditions concerning the market value would be welcome - where such market value exists.
"The major problem I see with this policy suggested to Franklin Templeton by the largest shareholder of the Proprietatea Fund is that it comes just as Romanian government is set to launch its privatization program, and taking into account that the Proprietatea Fund is a shareholder along with the Romanian government in some of the most important companies - SNP, Transgaz - this will create competition between the two entities and implicitly lead to lower prices", said Nicolae Gherguş, who went on to say: "The best example is precisely SNP, and we can't afford not to think that if the sale of the state's stake in it failed last year, it is even less likely to succeed this year, when the block of shares which is scheduled to be sold is twice as large.
Of course, the Proprietatea Fund can follow the privatizations of the State and can intervene where demand will be high, by selling its stock in companies in which buyers have a lot of interest, but obviously the two offers will step on each other's toes.
• Cristian Duţescu: Judging by the contents of the proposal made by "Elliott", we could infer that its authors want to liquidate the Proprietatea Fund within the next two years
Cristian Duţescu, a partner with law firm "Duţescu and Partners" considers that the proposal of shareholder "Elliott Associates" to speed up the sale of the assets of the Proprietatea Fund can be countered using four arguments, the first being the legality of the juridical relationship resulting from the request to summon a general shareholder meeting.
He said that from a legal point of view, one of the parties, namely the one which would have the legal obligation to summon the general shareholder meeting (Franklin Templeton), does not meet the legal requirements to enter such a relationship with the shareholders of the Proprietatea Fund.
"It must be clearly understood, by all the subjects of law involved, that there is a definitive court order which is liable to be enforced, which has invalidated the mandate that the shareholders gave Franklin Templeton on September 6th, 2010", he said. "Any legal act that Franklin Templeton would carry out at this time as the sole manager of the Proprietatea Fund runs the risk of being annulled, including the summoning of a general shareholder meeting".
Cristian Duţescu thinks that from the very start, the incongruity between the current legal status of the Proprietatea Fund and the request made by "Elliott" should be noted (the same applies for the request submitted by the heirs of the Malaxa family to get the Fund listed on the Warsaw Stock Exchange and the revocation of the Board of Representatives).
A second aspect noted by Mr. Duţescu concerns the fact that "the proposal to change the management contract partially conflicts with certain provisions of the Romanian Law of Companies and of the Capital Market law".
In short, he thinks that the only ways of supplemental distribution of revenues, as defined by the authors of the notice to attend the shareholder meeting, allowed by related legislation, are the reduction of the share capital and the buyback of the company's own shares. "Both operations have to be decided through an extraordinary General Shareholder Meeting and require compliance with certain legal imperative norms", Mr. Duţescu said: "Under these circumstances, I do not see why the manager of the Proprietatea Fund should be paid an additional fee, since the decision to reduce the share capital or to buy back shares rests with the Extraordinary General Shareholder Meeting, and once that decision gets adopted, the manager would have to carry it out anyway". Mr. Duţescu thinks that for the shareholders, it would make more sense for Franklin Templeton to sell assets of the Proprietatea Fund and to then buy back stock from the market, which would gain as a result of the cash earned by the Fund from the sale of those stakes. Even if that were the case, Cristian Duţescu considers that aside from the fact that it needs to be conducted within a price band set by the Extraordinary General Shareholder Meeting, the stock buyback procedure would have no other goal than to reduce the company's share capital, according to the Regulation of the European Commission no. 2273/2003. "As a result, I fail to see any great merit of the manager of the Proprietatea Fund that would justify the payment of an additional commission in such a case", Mr. Duţescu went on to say.
On the matter of the payment of additional dividends, aside from the amounts resulting from the annual profit, he considers that it is governed by the dispositions of art. 67 of the law no. 31/1990 and 238-239 of the Capital market law: "According to these laws, no dividends that are not established by law can be paid, except for dividends representing a quota of the profit presented through the annual financial statements. Therefore, no dividends can be paid outside the annual profit approved by the Ordinary General Shareholder Meeting which approves the annual financial statements".
Thirdly, Cristian Duţescu mentions that the contents of the proposal to modify the management contract would seem to indicate that its authors want to push for the liquidation of the Proprietatea Fund within the next two years, considering that it promotes the idea of a quick sale of the assets and the distribution of the proceeds to the shareholders as soon as possible.
The final aspect noted by Mr. Duţescu, concerns the fact that the two requests to summon the General Shareholder Meeting (the one made by the heirs of Malaxa and the one made by Elliott) and the inclusion of a representative of the "City of London" fund on the Shareholder Representatives Committee are apparently three distinct, unrelated operations: "All the three actions, however, are based on the acknowledgment of the position of Franklin Templeton as the current manager of the Proprietatea Fund and on the legality of the Committee of Shareholders in its current form". He thinks that the three actions can be viewed as a reaction to the decision of the Court of Bucharest of December 21st, 2011, proving that the most important shareholders of the Proprietatea Fund acknowledge the legality of the mandate of Franklin Templeton, despite the ruling. "I think that it would however be too much to think that the threat of liquidation looms over the Fund, and thus file a complaint to the administrative authorities (the CNVM, from the perspective of its revenues) and to the courts", Cristian Duţescu said.
Aside from these comments, he considers that the objective of a shareholder that supports the sale of an issuer's assets is justified and legitimate, when considered from the angle of the initial goal pursued when making an investment: "Any company can be liquidated through the will of the shareholders who control the majority of the votes required for making such a decision. The selected method however, needs to be the legal one".
• Ionuţ Popescu: "The shareholders have realized that the Fund is sitting on a pile of gold, but the shares are trading at 0.5 lei"
Ionuţ Popescu, the supporter of the law for the creation of the Proprietatea Fund, who also served as its managing director between 2009 and 2010, supports the proposal of the majority shareholder of the Proprietatea Fund to sell some of the Fund's assets, and says that all major investors act like that: "The goal of the shareholders is to make my as much money as quickly as possible". He went on to say:" The shareholders have realized that the Fund is sitting on a pile of gold, but the shares are trading at 0.5 lei".
• Mircea Ursache: "This looks like the last year of existence of the Fund, that's the only time when you sell and get your fill"
Mircea Ursache, the president of the Supervisory Board of the Proprietatea Fund between 2007 and 2010, criticizes the way the privatization of the Fund was conducted and the fact that the state did not increase the capital of the Fund through additional cash injections. He said: "There are two suspicious aspects to the way the government made its exit from the Proprietatea Fund. First of all, the government sold its shares, which means it will no longer be receiving any dividends. The second aspect concerns the fact that the Fund did not carry out the purpose for which it was created in 2006, namely to compensate the people whose assets were abusively seized during the Communist regime". Mr. Ursache considers that the state should have kept a controlling interest of 30% in the Proprietatea Fund, and the fact that it sold everything is "more than mere complicity in giving Romania's strategic companies away for free".
He said that in 2009, when the Fund had a dual management system, the state had a working capital (accounts and deposits) of 400 million Euros. In this context, Mircea Ursache said: "Why is the management of the Fund looking to sell assets to get money?" He went on to say: "This looks like the final year of the company, that's the only time when you sell and get your fill".
Mircea Ursache considers that the Government, through the Ministry of Finance, needs to come up with solutions to this problem, perhaps even participate in the share capital increase of the Proprietatea Fund.
• Adrian Ştefan Iuraşcu: "We are selling everything, but we don't know to whom!"
Adrian Ştefan Iuraşcu, the president of the "Civic Force" party, said: "What is happening is outrageous, we will find ourselves with the KGB owning shares in our companies". He thinks that at this time, the government should take action: "From a legal point of view, Franklin Templeton has no right to take any measure concerning the Proprietatea Fund, considering that there is a decision issued by a competent court that says so", and he went on to say: "Until things become clear, a Romanian manager should be appointed".
Mr. Iuraşcu considers that, the articles of incorporation of the Proprietatea Fund should include a special clause that would prohibit shareholders or managers to sell the shares which the Proprietatea Fund owns in strategic companies without the permission of the state.
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