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Photo by Judita Grigelytė (VŽ).
Ignitis’s current IPO process has several allies. These include distribution banks, lawyers and consultants who advise on the process, investors who plan to invest at an attractive price, the media receive advertising orders. Of course, everyone forms only a positive opinion about this process because it benefits them. Even ESO’s minority shareholders, who initially fought Ignitis, calmed down after raising the purchase price and increasing dividends (which cost the company a lot of money) and promised to buy shares through the IPO.
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 if used carefully and professionally it can be a useful tool to optimize the portfolio of SOEs and more importantly an opportunity for consumers to Lithuanians become investors alongside taxpayers.
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 investment money is small, to say the least, as more than 85% of Ignitis’s revenue comes from various fees, including 70% of the fee from the network, which is determined by investment needs. Monopoly activities and profitable projects can easily be financed with borrowed funds, working with banks, issuing bonds, reducing dividends, or increasing public investment. Ignitis is 100% owned by the state, which is guaranteed by 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%.
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 planned investments in the network and projects already implemented (such as cogeneration plants in Kaunas and Vilnius), EBITDA will be up to 30% higher in 2022 than in 2019, which means that in reality the shares are now They sell 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, in terms of state benefits, a good result would be to receive up to 580 million shares for 27.8% of the shares. 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 assessment 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 goal of “guessing the choice”, illustrates once again how easy it is to play with your own money (especially when they are in the state i.e. all of us). (IPO), expensive to buy (green energy projects are acquired).
The author of the comment is Dalius Misiūnas, rector of the ISM University of Administration and Economics.
The author’s opinion does not necessarily coincide with the editorial position.
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