Dalius Misiūnas. A critical look at the Ignitis IPO: Did anyone think about the state?

Let’s start with the fact that I personally have nothing against an IPO. I really believe that this is important for the Lithuanian capital market and when used intelligently and professionally it can be a useful tool to optimize the portfolio of state-owned companies and more importantly an opportunity for Lithuanian consumers become investors alongside the fee payers.

However, one side whose interest is lacking in this process is the Lithuanian state. It sounds like it should be the job of the finance minister, but the ambition to become the godfather of a “historic” IPO seems to outweigh the responsibility to the citizens, who provide virtually all of Ignitis’ revenue.

So I want to look at this IPO of the Lithuanian state, what it means of all of us, from a value perspective.

What is for sale. Ignitis executives say they offer investors the stability of a regulated monopoly business and the prospect of “international green development.” Well, the latter perspective is more of a PR slogan, because as stated in the IPO leaflet, Ignitis earns 8.5 out of 10 euros in Lithuania, from the fee paid by Lithuanian consumers: 7 euros comes from the tariff of the electricity and gas distribution network, 1 euro of the system services tariff, 0.25 euro of the supply tariffs, another part of the income is related to other support tariffs. Yes, the company declares ambitious development plans, but today nobody pays money for future benefits. Rather, everyone wants to earn safely, so they expect the share price to be discounted to ensure strong returns even in the absence of expansion.

Who needs an initial public offering. The decision to make the initial public offering was made based on an undercover analysis by a working group created by the Ministry of Finance. However, no analysis was conducted to evaluate the entire state-owned portfolio, other possible IPOs, unbundling and grouping of activities, and other solutions to achieve a higher selling price, that is, more value to the state. Not to mention, there was no public debate in the process that involved all stakeholders. Most Seimas members probably don’t know much about this project.

The main argument that an IPO is needed to make money for investment is small, to say the least, at more than 85 percent. Ignitis’ revenue comes from a variety of fees, including 70 percent. of the network tariff, which is determined according to the investment need. Monopoly activities and profitable projects can easily be financed with borrowed funds, working with banks, issuing bonds, reducing dividends, or increasing public investment. Ignitis 100% The shares belong to the state, which guarantees the company and as a result the credit rating of the company is directly linked to Lithuania. Therefore, if it is said that the proceeds from the IPO will be used for investments that are important to Lithuania, then a cheaper way would be to borrow from the state (or perhaps simply allocate part of the ‘money rain’ funds from the DNA to invest in Ignitis). So this money would cost practically zero interest, whereas in the case of an initial public offering, it will cost significantly more, around 10 percent.

Price. The established price range, even in the best of cases, will not allow the Minister of Finance to publicly set a target for an EBITDA multiplier of 10-12. At the maximum roaming price, the multiplier will not reach 10 when estimating the company’s 2019 Adjusted EBITDA. In recent years, the company has not even reached the return target set by the state, so when thinking about fair value, it is necessary to evaluate the average EBITDA expected for 2020/2021 instead of 2019. In this case, the sale would result in an EBITDA multiplier of 7.5-8.5.

Furthermore, considering the planned investments in the network and the projects already implemented (such as cogeneration plants in Kaunas and Vilnius), already in 2022 the EBITDA will be up to 30%. higher than in 2019, which means that the shares are actually now selling at a multiplier of around 7 EBITDA. It seems that the IPO is done in 1-2 years too soon. It is worth noting that the shares of similar European energy companies trade with an EBITDA multiplier of 11-12. Thus, considering the benefits of the State, a good result would be for 27.8%. shares to receive up to 580 million. up to 850 million euros. euros.

Retail investors. Selling as many shares as possible at a price favorable to the Lithuanian population would be the only valid argument for this IPO. The company would attract funds, and Lithuanian citizens who earn their income through the fee would become Ignitis shareholders and receive a refund. However, Ignitis’ decision to guarantee only 100 shares to retail investors, Lithuanian citizens (committing to buy them at the maximum price) shows that foreign institutional investors are given priority.

The goal should be to get as many fee payers as potential investors. In fact, Ignitis participation at an attractive price would be much better than the electoral payment of € 200. This could also apply to IPOs of other state-owned companies, and the Lithuanian capital market activity would increase significantly if several retail investors joined in.

Conclusion. In short, in the ignitis IPO process, a monopoly profit is sold, which Lithuanian consumers contribute through the tariff. This IPO is not necessary and is done without a strategic valuation and at the wrong time, and the price benefits the buyers (institutional investors) more than the seller (the State). Lithuanian retail investors are not given priority, although they should be the first beneficiaries. Unfortunately, this whole hasty, expensive and non-transparent IPO project, based on personal ambition, with the aim of “guessing the choice”, illustrates once again how easy it is to play with your own money (especially when they are in the State , all of us) and cheap. (IPO), expensive to buy (green energy projects are acquired).