Tens of thousands of companies around the world remain in state hands. But are governments willing to sell them and are they worth buying anyway? Charles Olivier reports.

State-owned assets worth more than $1000bn have been privatised since the British government first started the trend in the mid-1980s. Telecom companies account for more than one-third of this total but a huge range of other assets have also been transferred to the private sector – coal mines, banks, power stations, electricity grids and airlines.

But the pace of privatisation has begun to slow. According to the OECD, $100bn of state-owned assets were floated or sold to strategic investors last year compared with $141bn in 1999 and $153bn in 1997.

Accurate statistics for 2001 are difficult to obtain since only a few governments publish regular updates on trade sales – the preferred method of sale this year. But most investment bankers agree that privatisation activity has declined significantly this year.

So is the greatest auction the world has ever seen coming to an end? Have all the decent assets been sold, leaving only basket cases that no-one wants? Or has the decline been caused not by a shortage of interesting assets but by instability in the world’s stockmarkets? And are there attractive acquisition opportunities still out there that will come up for sale when the bear market ends?

The truth – as it so often does – lies somewhere in between. Even the most enthusiastic privatisation consultant would admit that a large percentage of companies still in state hands are in poor financial health.

Shipyards that have not won an order in years, retail chains so out of date the mannequins are still dressed in flares, coal mines that could not make a profit even if you sacked 90% of the workforce, fruit plantations hundreds of miles away from a port, and so on.

Yet there are still plenty of state-owned assets around that any international investor would be proud to own such as Eléctricité de France, KEPCO (South Korea’s electricity and power monopoly), and Germany’s regional banks.

Some of these assets – such as the US air traffic control company and the UK’s Post Office (now called Consignia) – are still in state hands because the governments concerned have not worked out whether they want to sell them.

Others such as Cairo Electricity and Royal Nepal Airlines are still state owned because the regulatory framework is not yet in place and/or the company has yet to be restructured. But a significant number are ready to be sold and only remain state owned because the seller has not yet been able to obtain a high enough price for them. Turk Telecom and Telecom Egypt, for example, have both been for sale for years.

So where are the most interesting privatisation opportunities and when will they come up for sale? The easiest way to answer this question is to examine each region and each sector individually.

Middle East/Africa

The largest number of companies still in state hands are in the Middle East and Africa. “These two regions are a long way behind the rest of the world,” says Ladan Mahboobi, a privatisation analyst at the OECD.

One or two countries such as Egypt, Turkey, Cote d’Ivoire and Ghana have sold off one-third or so of their state-owned assets. But the vast majority including large economies such as Nigeria, Iran, Saudi Arabia and South Africa have barely even begun.

Countries from the former USSR have made much faster progress. Most have sold off their manufacturing companies and their banks and are now privatising their energy, utility, mining and pharmaceutical interests.

The pace of sales has been faster in the west than the east. The central Asian states have more assets in state hands than Bulgaria and Romania, which are some way behind the Czech Republic and Slovakia, in turn lagging Poland and Hungary.

Asia

The number of state-owned assets in Asia is much lower because (with the exception of China) it had fewer to start with. Japan, Taiwan, the Philippines and Malaysia have sold most of their public companies. Thailand, Indonesia and Korea are about two-thirds of the way through privatisation.

China has sold $20bn of state assets already according to the OECD but it still has a huge number in public hands across a wide variety of industries. “China will be the busiest market in the coming years,” predicts Mr Mahboobi.

India has made less progress than almost any other nation in Asia

largely because its governments have either been unconvinced of the

economic benefits of privatisation or wary of pushing through politically sensitive sales.

“There are a lot of state-owned companies left in India,” says Mr Mahboobi. “The speed with which they get sold depends, as it does in China, on the ability of the government to secure public support for their privatisation.”

Western Europe

In western Europe, the biggest opportunities lie in France and Norway – both of which continue to own a significant number of important assets such as their electricity and gas companies. Germany, Italy, Austria and Switzerland all have regional banks still under public ownership.

A large number of former state assets in the UK, Denmark, Spain and Portugal are now in private hands as they are in Australia, New Zealand, Latin America and North America.

There are a number of interesting state-owned companies in these regions such as PDVSA and Pemex, the state-owned oil companies of Venezuela and Mexico but most of them will require a huge shift in public opinion before they can be sold.

A good way of working out which countries have the most to sell is to look at how much they have sold already. The OECD and the World Bank both have good databases on www.privatizationlink.com.

Care should be taken with these statistics, however. Just because China has sold $20bn of assets and Sierra Leone only Ł500,000 does not mean China now has less to sell than the troubled west African country.

Which sectors are likely to throw up the most opportunities? Investment bankers agree that the most active are likely to be power, telecoms, financial services, transport and mining.

There are plenty of companies to buy in other industries, such as pharmaceutical, chemical and cement companies, engineering plants and agricultural commodity producers. But most are small by international standards and fall – in their current state at least – into the basket case category.

Eminently saleable

The hottest prospects appear to lie in power and electricity. At the time of going to press, the only countries to have transferred most of their assets in these industries to the private sector were the UK, Chile and Spain. Some, such as Australia, Germany and the US, where energy companies are owned by federal states not governments, have sold some. Most, like France, Greece, Canada and Singapore have not yet begun.

“Almost every country in the world has something to sell, be it power stations, pipelines and electricity and gas distribution networks,” says Peter Fraser, head of corporate affairs at the International Energy Agency.

Meanwhile, they are much easier assets to sell during a recession than, say, manufacturing companies or airlines. “Governments should be able to find buyers,” says Simon Linnet, a managing director of NM Rothschild, one of the world’s leading advisers on privatisations.

The speed at which they come to the market depends on how much progress has been made removing price subsidies and establishing independent regulators. Singapore, Japan, Belgium, Greece and Germany, for example, are all ready to go. South Africa and Nigeria remain some way off.

Investment bankers predict considerable activity in the telecom sector. While almost all developed countries have already sold some shares in their state-owned monopolies and opened up the sector to competition, most still have large stakes.

Norway, for example, still owns 79% of Telenor; Sweden 70.6% of Telia; France 53.7% of France Telecom; Finland 52.8% of Sonera; Greece 50% of OTE; and Japan 46% of NTT.

Emerging markets

Meanwhile, there are dozens of emerging market deals in the pipeline, including the first sale of shares in the telecom monopolies of Egypt, Thailand, Kazakhstan, Madagascar, Niger, China, Morocco and Nigeria.

The financial services sector is harder to analyse. There are a lot of large banks and insurance companies – particularly in the developing world – for sale. India is looking for a buyer for the State Bank of India, for example, while Lithuania wants to sell its Agricultural Bank, and Kenya is trying to offload the Kenya Commercial Bank. These firms often have dominant positions in their domestic markets. Egypt’s four state-owned banks, for instance, control 70% of all the country’s financial assets.

But, broadly speaking, they have not attracted much interest from foreign buyers because of the reluctance of their current owners to restructure them.

For this reason, most corporate financiers are focusing on the regional banks of western Europe. “They are much easier to evaluate than emerging market banks,” says one London-based investment banker. “I would expect a steady flow of sales.”

Transport is likely to be another interesting sector. A few countries – Australia, Argentina, New Zealand, Mexico, Italy, the UK and Japan – have begun to privatise assets such as railways, ports, airports, airlines and roads. But most have not even started.

It is not an easy sector to take private largely because many of these assets are not run commercially and are heavily controlled by unions too powerful for governments to take on.

That said, some deals should come to the market over the next year, such as the sale of the port of Singapore and secondary offerings in the railway companies of Hong Kong and Japan. Spain is also said to be considering privatising part of its road network.

“India, China and South Africa have all talked about privatising their rail networks but they face a lot of political opposition,” says NM Rothschild’s Mr Linnett. “We are more likely to see things happening in the rail freight market in the EU.”

There are a number of airlines for sale such as Egypt Airways, Royal Nepal Airways and Royal Air Maroc. But, given the dire state of the aviation industry, they may prove difficult to float or sell in the coming months.

Gold diggers

The mining industry offers a number of attractive acquisition opportunities notably China’s coal and gold mines, India’s aluminium and copper plants, Turkey’s state-owned fertiliser company and (if the war stops) Congo’s mineral resources.

The company everyone would like to get their hands on is Chile’s Codelco, the world’s largest copper producer. But diplomats in Santiago say that the government is not interested in selling because the company provides too big a chunk of its revenue.

When and at what price state-owned assets come up for sale is a matter of some debate. “The number of companies definitely coming up for sale in the next three months is very small,” says James Sassoon, a corporate financier at UBS Warburg. “A lot of deals have been postponed until the first quarter of 2002.”

Much depends on the sector of the individual company. Recession-proof assets such as power stations, for example, are likely to fetch much higher price-to-earning multiples than airlines or retailing chains.

Another key factor is the financial health of the country concerned and whether it needs to raise money from privatisation to avoid a financial crisis or get the next chunk of aid from the IMF. Japan, Turkey, Poland, Argentina, South Africa and Brazil, for example, are all sitting on large budget deficits and are therefore much more likely to sell assets in the coming months than cash-rich nations such as Saudi Arabia or Norway.

Most countries fall somewhere between these two stools – having enough money to stay solvent but not enough to do all the things they promised at the last election. In these cases, the decision to sell or not is much more finely balanced and depends largely on whether global stockmarkets go up or down in the coming months and by how much.

A strong recovery would naturally result in a large number of companies coming to the market. “Price is a key issue for us,” says a spokesman for Telecom Egypt, a company valued at $8bn four years ago but now estimated to be worth nearer $4bn.

Further declines could, ironically, have the same effect. “Many governments have postponed sales in the hope that equity values will go back up to the levels they saw in the late 1990s,” says one London-based corporate financier. “But they cannot wait for ever. Once they realise the markets are not going to go up to those levels again for a long time, they will become more flexible on price.”