The secondary offering of "Petrom" begins with ... objections

• "It"s not about capping the price, but rather complying with legislation"

• (Interview with Mr. Rareş Nilaş, the managing director of BT Securities)

Reporter: On Friday, on the website of BURSA, a reader claimed that the low intermediation fee for the secondary public offering of "Petrom" charged by the consortium that won the call for tenders, is hiding ulterior intentions to maximize their profits by reselling the stake of 9.84%. How do you comment on that statement?

Rareş Nilaş: This is a period of low fees. In my opinion, the commission charged by the consortium led by "Renaissance", of 0.325% of the total value of the offering, is in fact intended to help them enter the Romanian market. We are talking about the highest public offering so far, and in my opinion, in this case money isn"t the only thing that matters. Aside from the commission itself, the consortium has collateral benefits from the publicity around the offering and major image benefits.

We want to make money later by participating in other offerings, whether they were state owned or private ... From this point of view, we are talking about a "delayed profit".

This is the explanation behind the low fee asked for the sale of 9.8% of "Petrom".

Any scenario claiming that there is anything else hiding behind the low fee is completely nonsensical.

Reporter: There are voices that challenged the setting of a maximum price for the shares of SNP, claiming (like another reader said) that if investors wanted to subscribe at 0.55 lei/share, whereas the maximum price 0.46 lei. The investor in question could not subscribe to 0.55 lei, and the state could earn less money ... Isn"t that a problem?

Rareş Nilaş: The setting of a maximum price is stipulated by article 189 of the Law 297/2004 of the capital market, as no fixed price was set in the prospectus. It is a legal obligation, which is also recurrent in the European legislation.

Setting a fixed price also relies on the premise that investors have a rational behavior ... Who is going to pay 0.55 lei/share for SNP, when the average price of SNP shares over the last 52 weeks was 0.37 lei, and its price in the latest trading session was 0.399 lei/share, why would anyone offer 0.55 lei/share?

We are not talking about capping the price, but rather about complying with legislation.

If the offer had been made at a fixed price, there would have been no need for a maximum price, but we have chosen to use a mechanism of determining the price of the offering using the volume of the subscription.

The same mechanism was used in the public offering of the shares of OMV AG, on the Vienna Stock Exchange, which rather common in Europe. Public offerings at a fixed price are far less frequent than public offerings in which the price is set through book-building.

Reporter: Many brokers and investors were very interested in the secondary offering, hoping that this would increase the free-float of "Petrom". If an investor were to come in and buy the entire block of shares at a maximum price, these expectations will have been for nothing ... Petrom would still have a free-float of just about 5%...

Rareş Nilaş: Our goal is to maximize the amount that the seller, the Romanian state could make by selling 9.84% of "Petrom". The free-float of "Petrom" is a collateral aspect.

The state couldn"t assume the costs of increasing the free-float of Petrom. Its interest is to make as much money as possible in order to cut its budget deficit, as agreed with the international financial institutions. The state couldn"t have set the goal of using this offer to further the development of the domestic capital market, as there are about 1,300 companies listed. The state did its best for the capital market when it listed the Proprietatea Fund. If an investor comes and subscribes the entire block of shares in the first day at 0.46 lei, the offering will be considered successful.

Reporter: The prospectus of the offering mentions that the eventual notification of a minimum price will not represent an amendment of the Prospectus. The question is: why wouldn"t the information on the price represent an amendment?

Rareş Nilaş: As long as the prospectus stipulates that the introduction of a reference price may take place, this fact will not represent an amendment. It is not a legal "trick". This is in accordance with the European customs.

The markets are very jittery in this period, very volatile, so one needs to be very cautious, instead of running the risk of having the secondary public offering be unsuccessful. Let"s not forget that our goal is to maximize the value of the secondary offering.

Based on the maximum price, the state is looking to make 610 million Euros for 9.84% of SNP, but it is also looking to reserve the right of approving a lower value of the offer, for instance, if the offer were to be made at Friday"s closing price, it would only raise 500 million Euros ...

Because of this, the state has reserved the right of imposing a reference price. It may choose to use it or not.

Reporter: Could the state announce, after the offering is over, that it wouldn"t be selling its stake in "Petrom", because, in theory, it hasn"t raised the amount it wanted? Prime Minister Boc said that if it doesn"t get more for the 9.84% of SNP than the Năstase government did, the state would abandon the sale ...

Rareş Nilaş: These statements are political, they are part of the political game, and they aren"t always connected to the economic reality and which I am unable to comment on.

In theory, what you said could happen. Still, the government can decide to set a reference price, and the offering could be considered successful, if it is subscribed in proportion of 80%.

The mechanism of the reference price works as follows: investors that subscribed below the reference price, have up to two days to make a higher offer, (either by allocating more money, or by subscribing less shares) or they can choose not to buy any shares.

Reporter: How was this price of 0.46 reached? Was the government looking to get a higher price?

Rareş Nilaş: This price was reached following the discussions with the representatives of the Government. Naturally, the government would have wanted a higher price, but one needs to consider the economic realities of the moment.

The secondary offering of "Petrom" is the first offering for a company that is already listed, which is why the maximum price could not ignore the reference price on the exchange. The problem is that institutional investors do not consider the price for the shares of SNP to b e relevant, due to the low free-float and liquidity.

I"m going to give you an example: it takes one month and a half for 10% of OMV, the majority shareholder of "Petrom", to be traded on the Vienna Stock Exchange. For comparison, it takes a year and a half for 10% of SNP to be traded on the Bucharest Stock Exchange. That is why, the price of SNP on the Regular Market is not considered relevant by many foreign investment banks, which tend to discount it. This is why we have opted for a mechanism to determine the price.

Furthermore, let"s not forget that we are talking about a buyer"s market. Many sale offerings were cancelled or failed in this period of economic crisis, and interest in emerging markets is low.

For instance, the sale offer for 21% of "Alro" Slatina was postponed until autumn ...

Reporter: When will you begin the roadshow for the offering of "Petrom" and where are you looking for investors?

Rareş Nilaş: We will start the roadshow on Monday (ed. Note: today), and we intend to go to London, Frankfurt, Vienna, etc, together with officials of the state and of "Petrom". We will be collecting irrevocable subscriptions until July 22nd, which is a first for the domestic capital market.

The Romanian brokerage firms which are part of the consortium will handle the promotion of the offering, in particular among domestic investors, while "Renaissance" will handle promoting the offering among foreign investors.

Reporter: There are voices that claim that Russian investors are interested in buying the block of "Petrom" shares that is being put up for and that a deal has already been struck ... How do you comment those claims?

Rareş Nilaş: If the intermediaries had been Americans, then it would have been said that Americans were the ones interested in buying the stake, if they had been Chinese, there would have been speculation that a deal has been struck with Chinese investors, and so on. These are groundless speculations. If that had been the case, the state could have sold the stake on the market for negotiated deals, in a "Deal" transaction, and the subject would have been closed, as there wouldn"t have been a need for a secondary offering anymore. The law would have allowed it.

"Renaissance" was chosen because of their expertise with emerging markets and in the sale of stakes in energy companies. Hence their interest in "Petrom".

(Recorded by ŞTEFANIA CIOCÎRLAN)

•

• Further observations concerning the Prospectus

The objection to the Prospectus, the one that seems to be the most serious, concerns a detail which will radically affect the entire mechanism for the formation of price and stock allocation.

The contestation which was allegedly submitted to the Romanian National Securities Commission claims that the Prospectus seems to base the mechanism for setting the price of the offering on an inadequate article of the law.

We hereinafter reproduce a large excerpt of the law, to allow a full understanding (the underlined sections are made by mine):

"Art.189.- (1) If the price and the number of shares offered to the public can not be included in the prospectus, on the date of its approval, the prospectus will contain:

a) the criteria and/or the conditions which will be used to determine the price and the number of shares offered to the public, and in the case of price, its maximum value, or

b) the possibility of withdrawing the subscriptions made at least 2 working days since the date when the final price and the number of 2 working days when the final price and the number of securities offered were registered with the CNVM and published according to art. 175.

(2) Investors that have expressed their desire to subscribe shares, prior to the publication of an amendment to the offering prospectus, have the right to withdraw their subscriptions, within 3 working days from the date of the publication of the amendment in question." (Law 297/2004)

In his interview, Rareş Nilaş refers to this article of the law, when saying: "The possibility of setting a maximum price is stipulated to the article 189 of the law concerning the capital market, when no fixed price has been via the prospectus of the offering. It is a legal obligation, which is also recurrent in the European legislation".

The problem here is that yes, the price is not included in the prospectus, but the number of shares offered (5,573,780,260) is!

The people contesting the Prospectus warn that the assumption of the article of the law which the Consortium of intermediaries requires a combination of two conditions - both the "price and number of shares" shouldn"t be included in the Prospectus -, instead of a disjunction - either "the price should be included", or "the number of shares".

I personally find this observation reasonable.

If the CNVM is going to agree with me, then that means no part of the procedure mentioned in the Prospectus will be legally valid.

Nor will the allocation procedure.

Because the offering is not part of the paradigm of the law.

In other words, the maximum price of 0.46 Ron shouldn"t be in the prospectus, and the objective of the state to maximize its profit shouldn"t be capped by this maximum ceiling, because, unlike Nilaş says, it is not required by the law and has no other justification for being included in the prospectus in the first place.

A second observation that deserves attention was made by a broker, in a private discussion, who nevertheless allowed me to make it public:

"Why is the allocation procedure so complex?!", he wondered, and went on to say: "First of all, if I am having trouble understanding the mechanism described in the prospectus, myself, even though I am a qualified broker and I have expertise, then what are the odds of the individual investor is going to understand it?!; this is the equivalent of driving customers away!"

I hereby reproduce the part of the Prospectus that the broker is referring to (page 234):

"The offering price for every Tranche is the lowest price at which the Shares Offered in the Tranche in question are subscribed in part or in full (in the event that not all the Shares have been subscribed), but at least equal to the Maximum Price and no lower than the Reference Price, in case the Reference Price was declared by the Seller.

The broker continued to express his wonder:

"The text seems to be contradicting itself, what does it mean by < < the lowest price?! > > Why aren"t the shares being allocated at the highest price that each tranche was subscribed at in part or in full et caetera...?! They are probably saying that (and they are saying it wrongly) that shares will be allocated to those who have subscribed at the highest price, but they will pay the lowest price at which the allocated tranches will be covered, but, careful, attention!, at the lowest price in a succession, starting from the top, which stops at the level at which the tranches are covered. Because, from the way the Prospectus was formulated, (multiple subscriptions are allowed): an investor could subscribe one of the tranches in full, at a low, more realistic price, and the other tranche could be subscribed in full again, but this time at the maximum price.

The result is the fact that you receive the entire tranche at the low price!

It is an obvious mistake, but it can always be said that in fact, it is a deliberate flaw because the shares have been set aside intended to be sold to a certain investor, just as the Russians" interest in our energy was discussed ..."

The broker also mentioned the fact that the principle "first come, first serve" used by the Prospectus (at equal prices, the separation is made based on the chronology of subscriptions), are combined with the wrong mechanism for forming the price, thus opening the road for reserving the shares for a certain investor, selected in advance.

I remember a similar experience: several years, "Broker" Cluj intermediated a public offering on the principle of the "first come, first serve basis", which led to investors trampling each other, and has resulted in a fierce fight with investors, which started at 2 AM, and has eventually resulted in people shoving each other in order to be first at the door.

The scandal continued, because people were allowed to subscribe at the company"s offices in Cluj and in Bucharest, and the synchronization of the clocks between the two headquarters could not be verified.

This time, for "Petrom", we have a consortium which consists of four brokerage firms.

That"s more offices to synchronize than in the case of "Broker Cluj" ...

In closing, we want to record the opinion of another broker who exclaimed: "But why didn"t they make a fair offer, with a starting price?"

I would answer: "Because that time it was an auction".

OK, and so what?

(MAKE)

• POST SCRIPTUM

I can"t agree with Rareş Nilaş when he says that the Prospectus allows the possibility of inserting a reference price, and its effective introduction could not be considered an amendment to the Prospectus.

The notion of amendment is defined by the dictionary of the Romanian language as follows:

"AMENDMÉNT, amendments, s. n. Improvement, modification of a text, especially that of a law. - Derived from the French word Amendement".

It becomes obvious that the definition of "amendment" does not depend on mentioning the fact that the modification was stipulated.

Regardless of the fact that the Prospectus states "In order to avoid any misunderstanding, the publication of a Reference Price will not represent an amendment to the Prospectus", the publication of a reference price does represent a modification of the Prospectus and what"s more important, a modification which is important enough to make some people change their minds and want to withdraw from the offering, which the Prospectus doesn"t want to let them do, even though is allowed by law.

I fail to see how the publication of a reference price isn"t an amendment, and I really don"t care what the European customary law says on the subject.

•

• The uncertainty around the gas deposit found in Oltenia

The announcement of "Petrom", which has found a "significant" deposit in Oltenia, was received with great skepticism by the colleagues of a major newspaper, with a rather disappointed title: "Petrom"s major finding in Oltenia is a flop".

Starting from the information that "Exploration well 4539 Totea was tested at a maximum rate of around 3,100 boe/d (barrels of oil equivalent per day) gas and associated condensate from a single zone", the journalists in question have justified their opinion by comparing the total output of "Petrom", which amounts to 91,700 boe/day, showing that the discovery of Oltenia only represents 3% of the total output.

Our colleagues at the aforementioned paper have a significant advantage in terms of "know how" which is worth mentioning: their owner is a major oil tycoon.

Unfortunately, I am not very good at exploration at all.

And sadly, over the week-end, I didn"t want to bother any oilman presume to bother any oil businessman for explanations.

On the other hand, I"ve read the announcement of "Petrom".

It speaks of a "deposit" and then of a "zone".

I"ve looked up some information on the internet and I"ve found that hydrocarbon deposits are made up of one or more "complexes".

In turn, "complexes" include several "horizons" or "zones" (and in some cases they are called "strata").

So, "Petrom" says that it has found a deposit and that it can extract about 3% of its current gas output "out of one zone" of the new deposit.

It is however true that they did not explicitly say that the deposit in question contains other "zones", but it did announce an encouraging fact, that it will evaluate the deposit, thus suggesting that it is hoping to find more.

Is this "a flop" or not?!

Perhaps Dinu Patriciu knows better.

But it is just as likely that his journalists didn"t run the article by him first.

What is a bit too obvious, is the fact that the announcement about the deposit was made the day after the announcement of the secondary public offering.

Some people view this "coincidence" as an encouragement for the state to ask for a higher price, ignoring another interpretation which is just as valid from a logical point of view: the fact that the announcement was postponed until the secondary offering was made, to prevent the seller from asking for a higher price...

A factor that supports this second interpretation is precisely the maximum price set for the secondary public offering, and which shouldn"t have been included in the Prospectus in the first place, if we consider the objections presented heretofore.

(Florian Goldstein)