Proprietatea Fund: Romania’s Biggest Privatization At 50% Discount

06.02.2011 By Andrei Chirileasa , Daniela Stoican

The reduction of the Romanian state’s stake in Fondul Proprietatea (FP.RO) to less than 33% transfers control over the investment fund’s EUR4 billion assets into the hands of private investors, who have bought shares at half their value in the last three years.

Thus, the state ends the biggest privatization in Romanian history, which started with the setting up of the fund in 2005, without completely solving the problem that the fund was created to solve, the fair compensation of people who were stripped off their assets by the communist regime.

Over the next few months, private investors, who include foreign investment funds, as well as people who received shares in compensation for the properties confiscated by the communist regime, will be able to call the General Shareholders Meeting (GM) and will be able to change the fund's articles of incorporation completely, eliminating the voting rights limitations that have until now allowed the state to hold control over the fund.

"As of now a GM can be called, which could change the articles of incorporation completely. We could end up in a situation where investment funds would own more than the state, one could vote in favor of selling significant assets," says Mircea Ursache, former chairman of AVAS (State Assets Resolution Authority), and former chairman of the fund (in 2009).

He believes the state losing control over the fund means the purpose for which the fund was created - compensating former owners, has been thwarted and that the Government did not have the right to relinquish control until the compensation process was completed.

The news that the state's stake in the fund fell to 24.5% started a move to take over control. As early as yesterday, a total of 170 million shares (1.2%) were transferred on the Bucharest Stock Exchange, through eight deals, for 85.3 million lei (EUR20.7 million). On the main market, 79 million shares were traded (0.55% of the capital), for RON39.5 million (EUR9.6 million). The share price went up by 3.3%, closing above RON0.5.

At stake are over EUR4 billion in assets, which include 20% stakes in Petrom and Hidroelectrica and a 15% stake in Romgaz, some of the most valuable local companies. The stake that the state parted with is valued on the Stock Exchange at just EUR1.67 billion, the fund's capitalization yesterday.

"This is probably the biggest privatization in Romania," says analyst Dragos Cabat.

He believes there were other ways to manage the compensation process that would have been more advantageous for the state. "One could have obtained more money from the direct sale of assets (the state's stakes in the fund's portfolio) on the Stock Exchange."

The biggest problem is that the state is forced to sell the shares at a much lower price than their real value, given by the fund's assets, because of the negative trend of the fund's share price on the stock exchange.

Not even the appointment of the US Franklin Templeton, one of the biggest asset managers worldwide, to manage Fondul Proprietatea was able to produce the desired effect by the Government, that is a rise in share prices and successful completion of the compensation process.

"This is poor management of the process by the officials of the state and by Templeton, which manages the Fund," Drago[ Cabat says.

No politician or party is willing to publicly admit that the compensation process is a failure.