Privates on parade

What on Earth does a developer need a publishing company for? Or one, for that matter, that sells furniture? Why should a developer be interested in a maintenance company producing spare parts for lifts? The answer is simple - they?ve got their eyes on the attractive land the firms own. In Poland it is those companies based in Warsaw that are the most attractive, because it is their land that has the greatest potential. And the developers interested in such privatisations are not hiding the fact that their main aim is the fixed property. But what about the core operations of the companies? The latest privatisations, which have caused something of a sensation on the market, have also shown that things can pan out very differently. Some of the companies privatised have closed down their operations, while others have managed to survive. "There are a lot of properties in the portfolios of Polish public entities that should be analysed and prepared before the privatisation process and an optimisation strategy needs to be implemented. Theoretically you can sell anything. However, the idea is to bring out the added value from the property portfolio, which will directly translate into more revenues from the privatisation. Otherwise those enterprises whose main assets are properties will not fully meet the target, which should be the maximisation of the value of the privatisation process," believes Katarzyna Gerl, a partner in Ernst & Young's property consulting team.

Millions for metres
The state treasury is the main beneficiary of privatisations. By selling shares it obtains cash and gets rid of any problems connected with the companies. Developers are also happy - after all, attractive properties are added to their portfolio. However, the employees of the privatised companies are in a less favourable situation, since they cannot always count on keeping their jobs. Companies recently privatised by the Treasury include Meble Emilia, Warszawska Fabryka Dźwigów Translift and the Bellona publishing house. And what do these transactions have in common? In each case the buyer was a development company.
In May 2011, Bellona and its employee-owned offshoot Wydawnictwo Bellona went into the hands of Creditero Holdings Limited, based in Limassol, Cyprus. It was sold for over PLN 46.7 mln. The company behind the Cypriot holding is well-known developer Ghelamco. Interestingly, despite the fact that Bellona publishes 300 books a year, while selling its shares the treasury considered that "real estate was the main value of the company". "When the treasury decided to privatise it, it was clearly the most optimal solution. At the time there was no publishing house on the market that wanted to take over Bellona as well as the land. So the developer and the employee-owned company proceeded with the privatisation. Bellona was subsequently divided into a publishing company and a property company. Ghelamco's shares in the publishing house were bought by Grupa Księgarska Olejniczuk. Thanks to this, we gained a strong industry partner," explains Józef Skrzypiec, the president of the management board of Bellona. And in the process Ghelamco acquired a number of attractive properties, including the former headquarters of the publishing house, right next to the developer's Warsaw Spire skyscraper, which is being built on the site of the former Wojskowe Zakłady Graficzne factory. The Bellona building itself will now become part of a multifunctional complex including the Warsaw Spire, while the relocated publishing house can now focus on its core operations. "The condition of the company itself has deteriorated in a sense. We used to have additional revenue from the properties. Now we have to pay rent. However, I must stress that this was the optimal solution. The developer behaved very ethically and we are very pleased with the cooperation," adds Józef Skrzypiec.

Getting rid of the problem
September 20th, 2012 was the day when the sale of an 85 pct stake in Meble Emilia was finalised. The value of the transaction exceeded PLN 115.1 mln, with Martlet, whose capital is affiliated with the Griffin Group fund, being the buyer. The transaction created substantial interest in the media. Why? Meble Emilia's properties include its eponymous store on ul. Emilii Plater in the centre of Warsaw, the current home of the Museum of Modern Art. As was the case with Bellona, the treasury emphasised that "the assets of the company include several properties that are attractive from a developer's point of view". There are precisely fourteen of such properties in different parts of Warsaw. The operations of the company were limited to the sale of furniture and the lease of its properties. "The company has already wound up its operations. Its employees took advantage of a voluntary redundancy programme and the whole process was very peaceful. Around 120 people left, but there are currently twelve employees still working for the company," reveals Przemysław Krych, the founder and head of Griffin Group. According to information obtained from the treasury, the investor undertook to provide the company with financing of PLN 5 mln within twelve months of signing the contract. The buyer also signed a benefits package with the trade unions of the company's workforce. Why did the developer decide to discontinue the core operations of the company? "From the very beginning of the acquisition process we informed the treasury that we were going to wind up Meble Emilia. We agreed on the benefits package and everything took place under the full sanction of the law and with the full approval of the ministry. In other words, the treasury had the problem of phasing out the company's operations taken off its hands. In a different scenario, the company would have had to go bankrupt for its properties to be sold - by the receiver," claims Przemysław Krych, who goes on to add: "Meble Emilia had been generating operating losses for many years and there was no reason to expect the situation to change."

To build and restructure
Another transaction and another approach. Sometimes the developer decides to continue with the operations of the purchased company, even though it is the real estate that remains the main attraction. This happened in the case of Warszawska Fabryka Dźwigów Translift. On September 19th 2012, treasury minister Mikołaj Budzanowski signed an agreement with Jerzy Leskowicz, who was representing a consortium of Europejskie Centrum Inwestycyjne ECI and New City Postępu II. An 85 pct stake in Translift was sold for more than PLN 35 mln. In an explanatory note sent to us by the treasury, they seemed keen to stress that "the investor expects to continue the core operations of the enterprise after a reorganisation and restructuring of the company". Interestingly, this was the second attempt to sell Translift. ECI was interested in the privatisation of the company as early as 2007, but in negotiating the benefits package failed to reach an agreement with the works council and the trade unions. So the privatisation ended in fiasco. ECI representatives point out that Translift has not carried out the necessary restructuring since 2007. "As a result of the gradual decrease of its market share and the deteriorating liquidity of the enterprise, Translift was forced to put up for sale some of its real estate assets to cover its losses and its current operating costs," reads an ECI statement received by 'Eurobuild CEE'. So what will be the future of Translift itself? "From the business point of view as well as ECI's aims, the privatisation of WFD Translift, which was carried out in 2012, was aimed at the acquisition of the rights to the main assets of the enterprise, i.e. its property. However, this does not mean that ECI will only deal with the real estate. As far as the production is concerned, it is ECI's aim to continue its business of modernising non-standard lifts and develop the manufacture and trading of spare parts. Taking into consideration the current investment mood, particularly the preference to put off purchases of new lifts, ECI sees an additional opportunity in the repair and maintenance services sector," continues the Europejskie Centrum Inwestycyjne statement.

It's not over yet
The treasury still holds some companies whose main value resides in their real estate, so we can expect more developers to be involved in their privatisation. Two developers, Echo Investment and Balmoral Properties, took part in the the sale of Przedsiębiorstwo Komunikacji Samochodowej Polonus of Warsaw. Wojciech Gepner, the representative of Echo Investment, revealed to 'Eurobuild CEE' that the company was interested in Polonus' land. "We are interested in plots on Al. Jerozolimskie and al. Prymasa Tysiąclecia, where the Dworzec Zachodni coach station and its head office are located. We would like to develop office projects on this land," he told us after the submission of Echo's offer. However, the government later withdrew from the privatisation proceedings, stating that none of the offers it had received were good enough. Will developers that already have some privatisation experience under their belts be willing to get involved in similar deals? "We are not ruling out such transactions in the future. However, I do not expect attractive offers to be coming out the treasury, but from the private sector. In exceptional cases we decide to continue the core operations of these companies by separating them from the real estate. Such opportunities are open to us thanks to the combination of our experience as a private equity operator and our activity in the property sector. However, this will only happen in cases when it makes sense economically. Otherwise we will only concern ourselves with the real estate," says Przemysław Krych. It is also worth considering whether the amounts at which companies with real estate as their main asset are being sold are profitable for the treasury. This is hard to assess. It is obvious that developers can make money on these transactions, but the question remains as to whether such privatisations are worthwhile. "In Poland we can see both positive and negative approaches to this process. There are public entities that do their homework before starting the privatisation and carry out an analysis of their portfolio. This is followed by the implementation of an optimisation strategy with regard to the specific properties. There are also negative examples - when there was no analysis of the portfolio and the value and the potential of the real estate was underestimated. The result is a failure to achieve the possible added value," explains Katarzyna Gerl of Ernst & Young.

Radosław Górecki