Zdeněk Bakala made the transaction of his life in May 2008, when he offered one-third of the NWR mining company on the stock exchanges in Prague, London and Warsaw. He managed to identify the moment when the bourses relaxed. Investors believed that the crisis was ending and were also hungry after months of drops. They jumped at the NWR shares and paid more than CZK 35 billion for them in a few days.
The strongest NWR owners, led by Bakala and long-term partner Peter Kadas, pocketed almost CZK 30 billion. None other Czech businessman has managed to earn such a sum in a single transaction in the middle of the crisis. Even the prestigious British magazine The Banker appreciated the success of the issuing when it published the results of its annual Deals of the Year poll for 2009, listing the public offering of the NWR shares as the European winner in the Equity category: “The flotation of the Czech-headquartered mining company New World Resources (NWR) for USD 5.5bn in May 2008 was not only the largest initial public offering (IPO) ever completed in central Europe and the largest European float for 2008. It also allowed existing shareholders to monetise their investment at the absolute peak of the commodities boom.”
Transaction and collapse of the year
Entering the bourse brought Bakala success. On the other hand, few investors ever cursed their transactions like those who bought the NWR shares as a long-term investment and were willing to pay CZK 630 per share last spring.
The rate collapsed in autumn, and the NWR shares were sold in March 2009 for less than one tenth of their June 2008 value and today are available for less than CZK 100. The crisis knocked the whole financial market down and decreased the value of all shares. But few titles recorded a drop similar to that of NWR.
Until recently, the NWR shareholders could comfort themselves by owning one of the most profitable Czech companies. The bourse newcomer managed to net almost CZK 10 billion last year. Today, however, the Ostrava-Karviná mines and coke plants are experiencing their worst times since the privatisation in the middle of the 1990s.
The turn in the company’s finances is all the worse for being so sudden. At the beginning of the year, the analysts were saying that the crisis would only slightly decrease the profit. The shock came when NWR published the quarterly results in the middle of May. Instead of an expected profit of EUR 10 million, NWR published a loss of more than EUR 2 million (some CZK 58 million). Further bad news is coming. NWR will lay off almost 3,000 people this year. The company is closing down the coke plant, and plans to cut this year’s investments by 20% and lower production.
Moreover, investors who lent the company credibility are leaving it. The US funds First Reserve and American Metals and Coal International, which owned about a fifth of the shares since 2005, will withdraw from the mother company RPG Industries by September.
What is happening to Bakala’s flagship? The explanation is simple. The prosperity of the Ostrava mines rises and falls with the prosperity of local steelworks. And the steelworks have been brought to their knees by the crisis. Their production has decreased to one-third or a maximum of one-half of capacity. If they need coke at all they produce it themselves, and their consumption of coal is marginal compared to last year. The coal is therefore accumulating in NWR storage, and reserves have more than doubled since last year. The prices are plummeting: coking coal fell by almost 20% and coke by more than 30% since last year. And it will get worse: “Especially the coke prices will certainly fall more,” Atlantik analyst Petr Novák said.
Nobody knows in what way the situation will reflect on this year’s results. “We are unable to predict the whole year’s developments,” NWR CFO Marek Jelínek said.
Even though the market value of NWR fell to one-seventh of its original value, it does not mean that the crisis is destroying Bakala. It is not only that the purchase of mines for which he and his partners allegedly paid some CZK 10 billion in 2004 paid off. What is important is that the money earned by the mines enables them to multiply and evaluate the assets in other fields.
Put money on transport services
In 2004, along with the Ostrava-Karviná mines, Bakala also acquired dozens of nonmining companies as part of the OKD holding. Before entering the bourse, he sold some of them while he included others in independent groups. Thus he formed the basis for other two holdings under his RPG: a transport group as part of the NWR Transportation company and RPG Real Estates. The latter holds 45,000 flats, hotels, lots and administrative buildings.
Bakala focuses on systematically strengthening NWR Transportation. He gradually bought Viamont Cargo (a division of the construction group Viamont); the Belarussian company Belterminal, which operates a rail shipping centre in Brest; and Čechofracht, the largest provider of logistic services in his OKD Doprava empire, which on its own is the second largest player in the field.
If the anti-monopoly office allows for the fusion with Čechofracht, Bakala will control a transport group with an annual turnover of more than CZK 9 billion. He would than become a strong player in train, road and marine transport in Europe.
Acquisitions in the transport sector are not over yet. “We are working on new acquisition projects. This time outside the Czech Republic. We are interested in two to three more companies,” says Attila Boros, member of the NWR Transportation board. He adds that there will probably not be any more acquisitions before the end of the year. The management will now be busy with integrating the acquired firms (the holding will now also include OKD Rekultivace). Another reason is that Bakala’s transport kingdom is also feeling the impact of the crisis.
“The decline in rail transport in Europe is estimated at 25%. During past recessions, the decline was less than 10%. So the developments this year are very dramatic,” says Boros. He adds that the demand for road transport is also declining.
But the effect of the crisis on NWR Transportation is still not as great as it is for the company’s mining sector. “Our revenues and operational profits from the beginning of the year until April are in adherence to our plan for 2009,” says Boros. Last year’s operational profit for OKD Doprava and for Čechofracht was close to half a billion crowns.
As recently as June 2008, Bakala planned to put the company NWR Transpiration on the stock market, as he had done with the mining company in the group. The question is whether he will make that move now: “Entering the stock market is still an appealing goal for the future. But talking about specific conditions and terms during there uncertain times would be premature,” says Boros.
Thanks to the capital backing the company, NWR Transportation owners need not rush with entering the stock market. They are not under pressure to acquire more capital.
The crisis has forced Bakala to change his real estate plans, however. Last year the directors of RPG Real Estates expected to make big investments in residential housing and to launch several development projects, including the construction of the biggest Czech skyscraper in downtown Ostrava.
“We are not giving up these plans, but somethings will be delayed or will progress more slowly,” says Tony Aksich, head of the real estate group RPG.
But the directors of the real estate group have more than just the crisis to worry about. Regulated rent does not cover the maintenance costs of flats in buildings that have been neglected for many years, and Bakala’s tenants are losing their patience. As of last year, their complaints are becoming louder, and they are organising demonstrations and writing petitions. And they are asking RPG to cheaply sell them the flats, as some municipalities have done with their tenants. A number of politicians are backing their efforts, using the issue in the campaigns for the upcoming general election. Jana Bobošíková, for instance, recently turned to the Polish members of the European Parliament with a letter warning the Poles “against the practices of NWR, a company that is planning expansion in Poland”. Bobošíková claims that tens of thousands of Bakala’s tenants are living in fear for the roof over their heads, in horrible conditions in decrepit houses and that the Finance Ministry is preparing to investigate the company’s finances.
The ministry really is preparing an audit to check whether Bakala’s RPG is meeting its responsibilities to its tenants. “They won’t uncover anything suspicious. We don’t have a problem with it,” says Aksich.
A nose for stocks
Even despite the problems caused by the crisis and by politicians, Bakala and Kadas are planning further expansion. Their managers say that the most lucrative deals could be in central and eastern Europe, especially Poland, Hungary and Ukraine.
RPG Industries bought a 25% share in the Ukrainian iron ore consortium Ferrexpo at the end of last year. It bought the shares with the intent to sell them at the same price to its subsidiary NWR. But the minority shareholders of NWR panicked at the thought of investing in a country that was in the midst of a crisis and political turmoil and refused to buy the Ferrexpo shares.
The NWR shareholders must regret that choice now; the value of Ferrexpo has nearly doubled in the last six months. It looks like Bakala simply has a nose for good deals. One can expect that he is planning to reshuffle the cards on the stock market in the near future.