CROATIA Osiguranje's sale under dispute

5 September 2013 — Daniela GHETU
croatia_osiguranje1Up to the August 31st official deadline, seven bidders have announced their intention to participate in the process of the top Croatian insurer sale. According to the local financial journal Poslovni Dnevnik, among the bidders there are the domestic financial group ADRIS, the American group AIG, the Austrian Vienna Insurance Group, the German ERGO, the Polish PZU as well as the Slovenian group TRIGLAV. The deadline for submission of non-binding offers is September 20th, 2013. Yet, the decision to sell CROATIA Osiguranje (CO) itself, as well as the figures which already circulated about this topic, has raised lively discussions in Croatia.

According to the official invitation for participating in this process published by the Croatian Ministry of Finance, the Republic of Croatia, holding approximately 80.2% of the total CO's shares, intends to sell a portion of its equity interest in the company, retaining a minimum of 25% plus one share of the share capital of the CO and up to maximum share of 30% after the increase in share capital. The transaction to privatize the Company will be carried out through an open international tender process.

The decision to privatize the largest insurer in Croatia, considered also one of the star companies of the country's financial sector, is still not well seen by many. Some large worker's unions believe that Croatia is giving up control of a strategic financial entity. On the other hand, some of the financial professionals who consider that, with a proper management and less political intrusion, CO would easily improve its profitability delivering on long term better financial results than the short term gain achieved by its sale.

However, at this time, as the sale process is already an ongoing one, the main subject under debate is the sale "price". According to information apparently leaked from the Ministry of Finance, the consulting firm KPMG has estimated CO's value at only EUR 210 million, meaning the Croatian state envisages to obtain from the sale about EUR 90 million, which is a very small amount, taking into consideration that only the real estate assets held by CO in downtown Zagreb value at least EUR 200 million (according to the company books).

In addition, despite the crisis, CO's shares achieved an excellent price on the Zagreb Stock Exchange (ZSE), of four to five times their nominal value. Thus, the company's share capital amounts to HRK 442,887,200 and consists of 316,348 shares with a nominal value of HRK 1,400 per share, out of which 307,598 are ordinary shares and 8,750 are preferred. However, according to the ZSE reports, the CO's share were traded during the last 52 week at an average price of HRK 6,500, with a peak of HRK 7,500 and a 52-week turnover of HRK 619 million (~EUR 82 million) for a total of about 106.526 shares traded. Simple math easily shows that on the stock market the state's stake offered for sale would value more than the EUR 90 million under discussion.

Other pricing models brought into discussion by the financial analysts are linking the sale price with the insurance premium volume or the book value of capital. Back in 2008, when VIG took over the insurance segment of Erste Bank in CEE, the published information revealed that the price was set by multiplying the annual premium by 1.2. Although the method is not much agreed outside the insurance market, it was used in several similar transactions. Another common evaluation method, according to prof. Jakovcevic from the Faculty of Economics in Zagreb, quoted by Poslovni Dnevnik, "starts from the base, formed by the annual premium income multiplied by 5 plus the book value of the capital." No matter which of these methods is applied, the resulting value would be significantly superior to the sales figures currently circulating.

However, as the sums resulted from the CROATIA Osiguranje and the Hrvatska postanska banka - assessed at about HRK 2 billion -, are already included in the projected budget revenue, the signal for the bidders is clear: this is the opportunity of the moment!

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