Azureway Limited and Atrox Limited
Acquisition of Fondul Proprietatea shares
In 2005, the Romanian government formed Fondul Proprietatea (FP) as a holding entity for stakes it held in dozens of Romanian companies in various sectors. These were former companies from communist times, mostly in the energy sector but also other industrial and service companies. At the time, the total approximate value of the fund was €2-3 Bn. The government formed FP to simultaneously meet two goals: (1) privatise former communist companies, a EU membership imperative, and (2) use the FP shares to compensate individuals and families who had their property brutally confiscated by the communists in the 1940s. FP was created with a very limited framework for owning and trading FP shares. The FP shares ownership was opaque, the shares were illiquid, and there was no transparent market for those shares. Moreover, most companies FP held stakes in were private, most of the stakes were minority stakes and there was virtually no financial information available about FP and its underlying businesses.
Between the formation of FP in 2005 and its listing in 2011, transactions in FP shares were unregulated and were executed person to person through hearsay and mostly in response to classified ads published in newspapers. While the valuation of FP shares – through its myriad of majority and minority stakes in various companies, many of them obscure, with little available information and no access to management – remained an art even after their listing, this was fiendishly difficult at the time of Centerra’s investment in FP shares in 2008-2009.
Centerra raised funds from Western investors through two vehicles, Azureway and Atrox, with the purpose of acquiring FP shares on the open market. It gathered as much information as it could from various sources in order to assess the intrinsic value of the FP shares, while evaluating a proper discount caused by the uncertainty, and the lack of information and liquidity. Centerra acquired shares from individuals over time in multiple transactions after advertising in newspapers. With prices on the opaque market varying widely, this required discipline and a systematic approach to valuation and negotiation, as well canny judgment, especially as the financial crisis was in full swing and hit Romania badly. The Romanian government repeatedly delayed the listing of FP due to political shenanigans, creating uncertainty and causing prices to vary widely. The listing eventually occurred in 2011 – see below an analyst report from the time – generating liquidity and an uplift in the shares’ value.
Given the fragility of the Romanian legal system and the uncertainty of the listing, Centerra had to thoroughly ensure it purchased only shares that were properly acquired by vendors with no risk of impropriety. It also had to negotiate with vendors in the face of other, less scrupulous and opportunistic bidders, while endeavouring not to appear as a motivated buyer as to not raise price expectations.
This was a strategy that was later followed by Elliot Advisors, the reputed hedge fund, who later became one of the largest shareholders in FP.
Following the listing of the FP shares, Centerra ultimately sold the holdings in Azureway and Atrox, thus realising a significant gain for their investors.