The “New Ownership Program”

Slowly more and more information about the "New Ownership Program" (in Hungarian: Új Tulajdonos Program [ÚTP]) is coming to light, though the full public discussion will take place only in March and April. First of all, the estimated value of all the state-owned entrepreneurial companies is about 1,500-2,000 billion forints.  Among them, of course, are real duds, such as MÁV. However, there are a few highly profitable companies: Magyar Villamos Művek (Hungarian Electric Works), Szerencsejáték (Hungarian Lotto), Állami Autópálya-kezelő (responsible for toll roads), and even Magyar Posta (Hungarian Postal Service). These companies are called "Zrt" which indicates that they are corporations in the sense of having shares, but right now the state is the sole shareholder. These "Zrt’s" would be made "open" in the sense that 49% of their shares would be in private hands. They would be freely traded on the stock exchange. A small percentage of this 49% would be available under the New Ownership Program.

As the plan now stands, a family would be able to purchase up to 1 million forints worth of stocks. They would have to make a down payment of 5% and could pay the rest over time. Ferenc Gyurcsány optimistically announced that in four years this 1 million forint initial purchase might be worth 5 million forints, in five years 10 million forints, and in eight years 20 million. From these numbers I gather that at the moment the government is thinking in terms of restricting the sale of purchased shares for at least four to eight years. All Hungarian citizens over eighteen would be eligible to buy stock in addition to citizens of other countries within the European Union who live in Hungary on a more or less permanent basis.

According to some estimates about 44% of the population has some savings: mostly in cash and in bank deposits with fairly low yields. The interest in ÚTP seems to be high. According to one of the polling companies, 2 million people are thinking of participating. As for reactions of the experts? Not surprisingly the management and brokers of the stock exchange are enthusiastic. Some people (for example, Éva Pálócz, head of Kopint-Tárki Zrt, an economic think-tank) worry that once the prohibition of the sales of shares is over, speculators will get hold of these stocks. These people bring up as an example the very badly executed program of "stocks" people received as compensation for lost property. Indeed, this was a nightmare as I know from my own experience. The hope is that there will be better safeguards this time. Surely, they must have learned something from that fiasco. Levente Blahó of Raiffeisen Bank is enthusiastic. He hopes though that a very large percentage of these stocks will freely circulate during the prohibition period because otherwise the prices of the stocks may be adversely affected.

For what my two cents is worth, let me compare this to what normally happens in an initial public offering (IPO) in the U.S. In an IPO a relatively small number of shares is offered to the public (Google, for instance, offered only 7%) with the rest retained by company founders, venture capitalists, and management. The "public" is rarely the little guy; normally before the stock starts trading on an exchange, investment banks and their best clients own the shares. Then the rest of the universe can weigh in. Do we believe in a company such as MasterCard or do we think it’s a loser like Vonage? The stock trades freely, sometimes wildly. In the meantime those who hold stock not offered to the public normally respect a lock-up period (usually a few months) and don’t try to sell their shares into the market. That would, of course, put pressure on the share price. But the stock that came public has changed hands countless times. This is the process of price discovery–what do people think the stock is really worth?

Under the Hungarian proposal it would seem that Hungarian citizens, assuming that they receive shares before stocks begin trading publicly, will be like American investment banks and their best clients (with huge leverage!) except for having a lengthy lock-up period. The balance of the 49% will trade freely on the BUX (akin to action after an IPO starts to trade on an exchange). So who wins? Well, if the stock goes up, everybody, including the government who is sitting on 51% of the company.

The closest thing to a leveraged buy out (LBO) is the deal being offered to Hungarians. Sounds good to me!

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Varangy
Guest
(sigh) I am not gonna go into how your analogy is inaccurate but as I have mentioned before, the rates of return brandished by Gyurcsány are outlandish, if not criminally irresponsible,to say the least. If Gyurci is so convinced of the inevitable (and spectacular) rise of the value of these state assets, why sell at the ground floor? Why not wait 8 years and sell it all at once at 20x the current value? After all, transaction costs are lower that way. *****The closest thing to a leveraged buy out (LBO) is the deal being offered to Hungarians. Sounds good to me!***** This does not resemble an LBO in any way, shape or form. FYI LBOs are executed to take public companies private via (mostly) debt funding secured by the company’s assets and paid off by the company’s cash flows. What this sounds like is what Viki gets (mostly rightfully, I must admit) accused of: idiotic economic populism. This is bound to be a disaster even if it is pulled off honestly – which is always in doubt in Hungary. Too many politicians with too many incentives for financial misconduct with a justice system that hardly works. It is impossible… Read more »
New World Order
Guest
Varangy- You know exactly why you can’t wait eight years and let the Country reap the return. Because in State hands the growth will not happen. Capital will be improperly allocated. The employment base of the firm will not be adjusted (i.e., the bad, useless workers fired). Basically, the company will perform as well as its owners expect, which will be poorly. This is not to say that these companies will necessarily perform much better as publicly listed and widely owned companies, but there is a good chance for this. Even Hu. managers originally appointed by the Govt. perform better and have their motives aligned better after privatisation [just compare the performance of MOL and OTP to ANY state owned company in Hungary]. Three points. (1) Hungary’s success so far in privatisation has been in selling companies to foreign strategic investors that bring not only the initial cash to the table, but also know-how and further capital. In a privatisation done via the capital markets with a large % of the stock going to retail investors, this benefit will be lost. Nevertheless, a true public company must still operate in a much more open manner than would a state owned… Read more »
Odin's lost eye
Guest
The sale of small parcels of shares to the public in the current ZRTs is an extremely valuable and powerful tool in revitalizing the economy of this country. Margaret Thatcher’s idea was to let all the people – not just the ‘institutions’ (merchant bankers and the like) have a little sip at the ‘brandy bottle’. Her ideas were hated by the ‘institutions’, the City and the ‘Mandarins’ (senior government servants) for several reasons. 1. The Institutions, City and Mandarins like to cozy up to each other for financial and other gains. 2. Big blocks of votes (shares) can be used for the benefit of the holders and not the companies whose shares are involved. Viz the outing of Arnie Winestock and the subsiquent destruction of GEC. Having ‘outed’Arnie and replaced him with someone of their own kind the ‘City’ looted this companies conciderable reserves by taking fees for doggy takeovers, buyouts etc. 3. Hoards of small shareholders are very difficult to control from the point of view of the Institutions etc. They can cause huge problems for the ‘Company Management’ at AGMs etc. As Mr Varangy says “It is impossible to educate an entire formerly Communist country on risk and… Read more »
Vándorló
Guest

Just some light reading: http://news.bbc.co.uk/2/hi/business/4061613.stm
A brief history of 20 years after privatisation in the UK. As the model shows, even unlikely candidates can go under the hammer as the public and markets develop a taste for these things. As also noted, it’s a great way to balance the books, cut bureaucracy and tame trade unions. This unholy trinity have to be prime targets for the next wave of development.

Varangy
Guest

Good piece. I am a libertarian and fully support privatization of State assets. That noted, I think foisting a half-baked privatization scheme on a naive public will only end in financial tears for said public.

Viking
Guest

There is in the beginning of the BBC-article the sentence “Oddly, de-nationalisation seems to have been largely an accident – or, at best, a policy emerging by trial and error.”.
How well does that not fit in on the Hungarian situation, where it, at least seems, to be a quick thought-up tactical move to get the people and media to speak about something else than the Referendum.
Naive public? Well, the BUX has been one of the better in the region to invest (if you know where, as always), so the “public” has had it chances to learn.
Compare the situation when the Swedish Government did the same thing with the old State TeleCom company (Telia). A very hyped share that was over-sold in advance, but after 5 minutes of trading dropped to 50% of the 1st price. Still there after 5 years or so. You cannot call the Swedes naive, but of course there were tears.
Just that there are always risks involved, but you cannot let that stop you.

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