Editorial
02.07.2014
By Aivars Jurcans
mergers.lv

The leaks of confidential information about the disposal process of Citadele banka AS (more on that in our earlier note) have triggered reactions from a range of different sources – from journalists to experts to politicians. As a rule, the emotionality and nature of comments are inversely related to the experience and understanding of how the markets and international transactions work – less understanding generates more populist, albeit seemingly well-intended, suggestions. Once again, ignorance is bliss, indeed!

Most of the comments are related to one of the following questions:

  • why should the Government sell a successful banking operation?
  • why should the bank be sold now as opposed to later?
  • why is the disposal process not transparent enough to the general public?
  • why the prices offered are so low?

Since the first two questions are part philosophical and part legal I would rather focus on the areas I feel more comfortable about – the process and the value. A few thoughts about the process this time.

Any sale by its nature involves at least two parties – the seller and the buyer. Their respective bargaining powers depend on the attractiveness of the item on sale. The more sought after it is, the more power and freedom the seller has in defining the rules of the process. While for us, Latvians, this might be THE transaction (which some are comparing to parting with the crown jewels), on the global and even European scale this is just one of the banking assets available for sale. To put things into perspective, according to a relatively recent study by an international consulting firm, in 2013 there were between 400 and 725 banking operations (whole banks, bank business lines, bank subsidiaries or asset bundles) in Europe alone to be available for sale within the next 12 to 18 months. To use the industry jargon, this is an absolute buyers’ market.

While there may be different additional objectives in any sales process, the disposal is primarily about maximising the proceeds to be received from the sale. Contrary to the common misconception, selling in an open auction is not always the appropriate mechanism to achieve this. This is very much the case when the object of sale is a company. The competitive bidding process run by a professional reputable adviser has proven to yield much better results and has become an accepted industry practice worldwide.

Major international investors are seeking predictability and confidentiality in any transaction process. They are considering and closing tens and hundreds of deals worldwide annually and competing against each other in the process. Revealing what they are bidding for and how much they are willing to bid is the most sensitive information, the disclosure of which might have damaging effects on their competitiveness and business interests. For this reason, many major international investors even do not participate in competitive processes, while practically all would refuse to take part in an open auction. Thus, providing more disclosure to the public during the process (which might appear as serving the best interests of taxpayers) is likely to result in a smaller number of interested parties, reduced competition, and, ultimately, lower sales price.

The role of an investment banking adviser – in the case of Citadele, Societe Generale – in a competitive bidding situation is to approach all the right parties with the right investment “story“. Their task is not only to generate compelling arguments why Citadele is a superior acquisition opportunity and to get them across to as many potential investors as possible. They also have to create a “buzz” suggesting that this asset is very much sought after and not to be missed. From the public information available, there are no grounds for doubting Societe Generale’s ability to perform this role. On the contrary, so far they have been running what could only be considered a successful process under the circumstances resulting, apparently, in bringing in at least five offers.

The role of Latvian Government as the ultimate seller in the process is to decide on commencing the sale and to define the ultimate objective (and any additional expectations it may have in relation to it), to nominate an adviser it finds competent and trustworthy to run the process, and, at the end of it, to decide on the sale to the winning bidder. Any doubts should be voiced and debate held before making the decision, not after. With the first two decisions already made, any tinkering at this point (and the suggestion to debate the disposal process at Parliamentary committees is nothing else but a clear attempt of ignorant tinkering) might only disrupt the whole process. Can the country afford this?

Sincerely,

Aivars Jurcans
editor@mergers.lv

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