Title: Aucun titre de diapositive
1 Privatization strategy Kombinat aluminijuma
Podgorica
DRAFT June 2004
2Privatization strategy of Kombinat aluminijuma
Podgorica
- Section
- Executive Summary
- Objectives of the Government of Montenegro 1
- Investors rationale and concerns
2 - Key issues
3 - Target investors group 4
- Eligibility and selection criteria 5
- Principles of tender process 6
- Timetable of privatization 7
3Executive summary
4Executive summary
- Privatization Strategy of KAP and its main
features result from understanding of key
objectives of the Government of Montenegro in
privatization of KAP the analyses mentioned in
the Diagnostic Report and sale prospects arising
out of the Preliminary Market Assessment - The launch of the sale proces of 65,5270 shares
of KAP assumes that favourable answer is given to
the key privatization issues identified during
the initial stages of the work. We believe that
recommendations offer the best possible
equilibrium between different objectives and
constraints of the transaction, while taking into
account the real world feedback which determines
the feasibility of the transaction. - The proper solutions of these key issues, in line
with market constraints and expectations should
be treated by the Government of Montenegro as a
condition of sine qua non of successful
privatization and given the highest possible
priority.
5Executive summary
- Under the assumption of satisfactory solution of
key issues, we believe that the tender procedure
will yield a sufficient market interest as to
offer reasonable chances of transaction closing,
providing the negotiations between potential
bedders and Major Creditors. - Current market conditions are favourable to the
potential transaction even if high aluminium
prices have had a negative effect on the level of
potential discount Major Creditors may consider
granting to potential investors as well as on
Major Creditors Willingness to get out of the
company.
6Objectives of the Government of Montenegro
7Objectives of the Government of Montenegro
- Any transactions is structured in order to
fulfil and/or maximize the legitimate objectives
of the seller while taking into account at all
times the situation and specificities of the
asset offered for sale, as well as the market
feedback and reality, reflected by the level of
interest-or lack thereof-from potential
investors. - The sellers objectives naturally influence the
transaction structuring and are usually reflected
in the eligibility and selection criteria of the
tender. - In accordance with proposal of Advisor which was
formed on the basis of communication with Tender
Commission and Working Groups, the following
elements may be considered as main objectives of
the Government in the privatization of KAP - Survial and long-term development of KAP
- Being the countrys largest company and
representing one of the pillars of the economy
with strong influence on the GDP, employment and
financial situation of Montenegro, the target of
the privatisation of KAP for the Government of
Montenegro is to ensure survival and long-term
development of Company. The objective is to
atract a solid investor who will secure the
position of KAP on international markets, improve
its competitiveness and allow rehabilitation of
production tool by introduction of new
technologies and international standards of
business and management with possible further
increase of capacities.
8Objectives of the Government of Montenegro
- Survival and long-term development of associated
businesses - The privatisation of KAP is also understood by
the Government of Montenegro in the context of
KAPs interdependence with Rudnici Boksita, the
EPCG, the Railway Company, the Port of Bar and
many other companies in Montenegro. - Addressing of social issue
- Given the fact that KAP and the bauxite mine
rudnici Boksita are overstaffed employing over
4900 employees, the objective of the Government
is to preserve to the extent possible the level
of employment, to include a social plan as an
integral part of privatisation program and to
secure a certain minimum level of social
commitments to be undertaken by the incoming
investor. - Settlement of the obligations of the DRA
- The complex debt situation of KAP resulting
primarily from the past economic sanctions on the
former Yugoslavia requires an active approach of
the Government of Montenegro in debt
restructurings with the Major Creditors. It is
therefore necessary that through privatisation of
KAP settles the obligations arising out of DRA,
including those resulting from the GoM letter of
guarantee for the part of debt related to
investments and to the working capital facility.
9Objectives of the Government of Montenegro
- Addressing environmental issues
- One of the main issues which should be salved in
KAP concerns the environmental pollution. The
privatisation is considered as a way to encourage
the transfer of new technologies and improvement
of the operations, leading to progressive
reduction of the gap between the level of past
and ongoing pollution so the KAP can respect all
ecological, healthy and protection standards of
Montenegro and European Union.. - Attracting foreign investment
- Foreign direct investments are a key driving
factor for economies in transition, having
positive impact on sustainable GDP growth,
exports and general economic stability of the
country. The privatisation of KAP, even if it
will not represent significant inflow of foreign
capital, will be perceived, due to its size, as a
catalyst for other investments of foreign
investors in Montenegro. - Timing
- Privatization strategy was prepared having in
mind that efficiency and successful closing of
process is of paramount importance to the
Government of Montenegro.
10Objectives of the Government of Montenegro
- Public image
- One of the key concerns is to run a process that
will be fair and transparent and also will be
perceived as such. The strategy described
hereafter is aimed at ensuring the credibility of
the privatisation process and will contribute
strongly to building investors confidence
towards the country. -
- The successful completion of the transaction
will definitely have a strong positive impact on
the perception of Montenegro as an
investor-friendly environment and should
encourage further development of the foreign
direct investment. Properly run tender process,
perceived as fair and transparent, shall have a
positive impact on public acceptance of the
transaction and shall reduce the scope of
potential criticism.
11Investors rationale and concerns
12Investors rationale and concerns
- The main objective of the privatisation strategy
is to attract strong and experienced strategic
investors to invest and manage KAP over the
logn-term. In order to attract such investors and
ensure that the sale process generates sufficient
demand from investors, the sale strategy should
take into account investors rationale and
concerns. - In that sense different recommendations of
financial Advisor arising out of the Diagnostic
Report were based on knowledge and understanding
of the company, but more importantly, on
knowledge of the market and constant dialogue
with potential buyers, understanding of their
strategy and constraints. - On such basis, the key limitations of potential
investors including the following issues are
being identified - Control of management decisions
- Strategic investors want to ensure that they
would be able to control and largely influence
the key management decisions concerning issues
such as purchasing, labour, capital investments,
organisation and other issues. In general,
investors prefer not to undertake strict
privatisation obligations resulting in a
limitation or loss of control over various
issues.
13Investors rationale and concerns
- Return potential
- Prospective investors will analyse carefully the
operations of KAP in order to assess (i) KAPs
profit generating potential (ii) the potential
for cost savings and other efficiencies (iii)
the levels of capital expenditures required in
future years. It is therefore necessary to
carefully decide on the priorities of the
Government in the context of the above-mentioned
return potential factors specifically, given
high level of up-front investment expected from
the investors in relation to the DRA debt. It is
critical for the transaction success to create
favourable conditions for the potential investor
in order to guarantee/secure an expected return. - Purchase of bauxite
- KAPs dependence of Rudnici boksita Nikšic for
the purchase of bauxite if a major concern for
investors and could represent a significant
barrier in the privatisation if secure long-term
supply of bauxite on fair terms is not ensured.
Investors that were familiar with the situation
often understood common ownership of KAP and
Rudnici boksita as the most convenient option.
It means that the bauxite price and general rules
of operation of two companies should not be
imposed upon the incoming investor but can be
established post-transaction. - Supply of electricity
- Adequate conditions of the purchase of
electricity, representing one of the highest cost
items of KAP, are essential for the long-term
development of the company. The investors
stressed the fact KAP will be competing with its
products on the world-wide market and cost should
therefore be competative. It is crucial to secure
not only a favourable price level but also this
price to be applied for longer period of time.
14Investors rationale and concerns
- Employment and social aspects
- Some of investors contacted in the market
assessment phase were to a large extent familiar
with the employment and social situation of KAP,
being aware of the heavy overstaffing and
invalids issue. Naturally, their preference in
connection with the privatisation is to preserve
control over their restructuring plans, yet would
be able to accept an adoption of a reasonable
social programme. On the other hand, all
investors consider the invalids being on the
payroll of KAP as a heavy burden and believe it
should by treated by the Governmental social
schemes. - Debt
- The debt issue has a specific position not only
because of the heavy indebtedness of KAP but also
due to the fact that some of the Major creditors
are also interested in the privatisation. Key
potential acquirers are aware of the complex debt
situation and recognize that they are in better
position than the GoM to negotiate a debt
settlement. - Long-term visibility
- Among the objectives of the privatisation of KAP
is the maximisation of funds of capital to be
spent by the incoming investor in order to secure
the survival and long-term development of the
company. Within their evaluation of the
investment opportunity, investors shall prepare
business plans based on which a discounted cash
flow model is made. The longer the visibility of
the economic environment of the target and its
main parameters, the less uncertainty is
reflected in the discount factor of their
valuation. Therefore, investors price
calculations are maximised when based on solid
parameters over a sufficient time period. This
applies especially to the visibility of the price
of key inputs (power, bauxite)
15Investors rationale and concerns
- Competition from similar transactions
- International strategic investors will compare
the investment opportunity in KAP together with
the related conditions, with other privatisation
or sale projects ahead or underway, as well as
with possible green-field projects. Competing or
forthcoming opportunities could potentially pose
a problem of timing and perception of KAPs
relative attractiveness. In this respect, key
drivers for attracting potential investors rely
on an attractively structured and
uncertainty-proof transaction. - Respect of the announced sale process, timetable
and transparency - Regardless of the sale method that will be
retained by the Government, bidding rules,
bidding assumptions and selection criteria should
be specified up-front and strictly adhered to.
Investors expect that the conditions, based on
which they form their price offers, would remain
unchanged and be respected in practice. Any
change of rules may deter potential investors
leading to their withdrawal. In fact, many
bidders will participate in tenders only if they
believe that they bave a real chance of winning,
so much that submitting a bid represents for the
bidders a financial cost that may well exceed EUR
1 milion. - Country risk perception
- Perception of Montenegros political stability,
the Governments economic policy and the
countrys relative positioning among the
countries in the region is will be a significant
factor behind the investors decision to invest
or not in KAP. The country risk element will
determine the level of prospective bidders
valuation of KAP either through the multiples
range which would be applied to these
transactions or as a risk spread included in the
discount factor used for calculationg the net
present value of KAPs free cash flows. It is
however fair to say that international
acquisition policy of potential bidders can be
affected by country risk incidents elsewhere in
the world.
16Key issues
17Main privatisation issues
- By means of market assessment we have analysed
the interest, the perception and major concerns
of the investors in connection with the
forthcoming privatisation of KAP. Results of
examinations are given in the Diagnostic report
identifying following key issues for the
transaction - - Debt to Major Creditors (Debt
restructuring Agreement) - - Non DRA debts
- - Electricity price and conditions for the
contract on electricity - - Environmental protection norms
- - Social issues and employment level
- - Anotech contract status
- - Downstream capacities
- - Ownership in the Bauxite mines
- For each of the key issuesTender Comission has
established Work Groups consisting of
representatives of various bodies. The initial
aim of the Work Group was to find a solution
which would facilitate the privatisation of KAP
and address the major concerns of the potential
investors. - Based on the work groups analysis and advisors
recommendations, proposals for each key issue
have been formed. Working groups and advisor have
had different attitudes regarding the issues of
electricity price and Bauxite.
18- Debt toward the Major Creditors
19Debt toward the Major Creditors
- The Debt Restructuring Agreement of KAP was
signed on April 27, 2001 and was classified in
three classes. In the Class A debt are Glencore
(5.660.120 USD), Rudnici boksita (Bauxite Mines)
and EPCG (3.780.560 USD) and Standard Bank/Gerald
(1.000.000 USD). The total debt from this Class
10.441.680 USD with related interest of 12 (for
Standard Bank/Gerald the interest amounted 6,5
or LIBOR 2,5) was paid on March 31, 2004. - Class B consists of debts in the amount
of 111.127.000 USD and they belong to Vektra
(53.100.000 USD), to Standard Bank/Gerald
(28.498.000 USD) and to Glencore (a) 5.729.000
USD and (b) 23.800.000 USD), with interest of
6,5 or LIBOR 2,5 (the smaller amount is
taken). - In the Class C are Vektra (8.056.527
USD), Glencore (1.200.000 USD) and Domestic
Creditors (25.000.000 USD) with interest of 6,5
or LIBOR 2,5 (the smaller amount is taken). - The Class C calculates interest from 2006, and
the interest is going to be repaid from 2013. - The Dabt toward Main Creditors as at March
31.2004 (according to data of Standard Bank
London Agent Bank) amounts 138.288.205 USD
toward Vektra 69.252.292 USD toward Glencore
34.757.626 USD and toward Standard Bank/Gerald
34.278.287 USD. The company Sinochem of London
has law suit with KAP due to 3.340.000 USD.
Several times the Standard Bank has been informed
about this because they undertook the claims of
the Sinochem. - Until privatization the KAP debts will be
reduced significantly (the reduction of aprox.
EUR 15 millions is expected) because the market
price of aluminium is rather high, therefore this
should be taken into consideration during talks
with Creditors and investors.
20Debt toward Major Creditors (Continuation)
- Proposal
- Given that potential bidder is in better position
to negotiate KAPs debt and to reach solution
with the Major Creditors, then sellers or
advisor, it has been proposed to enable direct
negotiations among pre-qualifed bidders and the
Major Creditors with reference to conditions and
terms of compensation of debt. - Organized process with reduced number of
candidates, limited period for negotiations and
scope of negotiations previously agreed with
Major Creditors and candidates will maximize
chances for success of negotiations.
21- KAPs debt toward the Government of
Montenegro, the State funds domestic state
companies and pre-sanctiones debts
22KAPs debts toward the Government of Montenegro,
the State funds, the domestic state sompanies and
pre-sanctiones debts
-
- By Debt Restructuring Agreement US 25 millions
was anticipated for restructuring of KAPs debt
toward the Government of Montenegro but only US
20 millions was restructured toward it. Domestic
state companies could not fit into in the rest
of US 5 millions, therefore the indivudual
contracts on debt restructuring with EPCG,
Bauxite Mines, Jugopetrol and the Port of Bar
were signed. The base for these contracts was the
solutions from the Debt Restructuring Agreement
of KAP. We mention that the Railroad of
Montenegro refused to sign the contract. - According to delivered table of the status of
domestic debts (KAP owes on behalf of
pre-sanctions debts (mostly the Paris club)
around EUR 32.5 millions (unofficial data of
CBCG), then to the Government, domestic state
companies, funds and banks on the basis of
restructured and non-restructured debt of cca EUR
79.5 millions on behalf of obligations arose up
to October 7, 1998. At current exchange rate, and
EUR 4.5 millions the obligations arose in 1999,
2000, (the law suits with EPCG), and 2003. (the
restructured debt). KAP has obligations toward so
colled other creditors (25. maj Macedonia and
Vitol Switzerland) of cca 1.8 millions, as
obligations undertaken from the Government in the
period up to October 07.1998. - Obligations of KAP for these three groups of
Creditors, amount in total EUR 116.58 millions
(USD 78.476.588,00 EUR 50.584.873,00, SHF
647.532,00) according to exchange rate of CBCG
dated May 24, 2004.
23KAPs debts toward the Government of Montenegro,
the State funds, the domestic state Companies and
pre-sanctions debts (continuation)
- Proposal
- The debt toward the Government, State funds,
domestic state companies as well as pre-
sanctions debts to be separated from the balance
of KAP and assigned to the competence of the
Government in order to be used as additional
quarantee which will be progressively paid off as
the new investor fulfills its obligations. In the
meantime, it is necessary the Ministry of finance
and Central Bank of Montenegro to bring into
accordance data on the amount of pre-sanction
debts. - KAPs debt to Jugopetrol Kotor will be solved
separately according to the agreement that KAP
and BNP Paribas will reach with Jugopetrol Kotor
regarding regulating the debt toward this company
(it is possible debt to be paid off persuant to
the signed Debt Restructuring Agreement which has
been signed by KAP and Jugopetrol). - The Government of Montenegro is obliged to help
in bringing into accordance the KAPs debt to
Railway of Montenegro, having in mind provisions
of the Debt Restructuring Agreement. - KAPs restructured debt to the Bauxite mines will
be salved separately, with possible additional
financing of the Bauxite Mines by KAPs investor.
24 25Electricity price
- It is important to provide KAPs Buyer with
electricity supply under competative prices for
longer period of time. Potential investors
usually make comperisons of electricity tariffs
in worlds smelters as well as structure of costs
of the world aluminium industry. These costs are
main indicators of metal price on long term. - Potential investors see an adequate addressing
of electricity issue for KAP through building of
new power plant or through provision of
electricity supply through long term contract. In
case of construction of new source of
electricity, the Buyer will need to provide a
interim electricity supply. - Proposel of price relations of EPCG and KAP
- Alternative 1
- 1. Price relations of EPCG and KAP in
2005. - Electricity price which EPCG will deliver to the
KAP in 2005. is formed according to the
following - a)Â Â Â for year 2005 EPCG is obliged to provide
annual delivery up to level of 1.204.762 MWh in
equal monthy instalments i.e. 2/3 of necessary
electricity for production - Â b)Â Â Â Electricity price from item a) is
- 24,39 USD for MWh, converted into EUR
according to middle exchange rate from echange
rate list of ECB on day of invoice issuing. If
the result of conversion is less then EUR 20.44
the price of EUR 20.44 for MWh will be applied. - c)Â Â Â Â Â Costs of electricity transamission
independently purchased by KAP from abroad, will
be paid EUR 2.21 for MWh.
26Electricity price (continued)
- 2.    Price relation EPCG-KAP for the
period 2006-2008 - a)Â Â Â Â Â Â In the period 2006 - 2008 EPCG is
obligated to provide annual supply up to the
level of 1.204.762 MW/h in equal monthly
tranches, i.e. 2/3 of the energy needed for
production - b)Â Â Â Â Â Â Electricity price (CE) from the item a)
shall be established under the formula - Â CE PC BK , Â where
- Â Â Â Â Â Â Â Â PC initial price established in the
item 1. b) is 24,39 USD for MW/h converted in
EUR under the ECBs average exchange rate on the
date of invoice issuance. If conversion result is
lower than 20,44 EUR, price of 20,44 EUR for MW/h
shall be applied.) - Â Â Â Â Â Â Â BK energy price correction in case of
positive deviation of primary aluminium price
from the reference value of 1.550 USD/t . - Â BK should be calculated according to the
following - Â BK ((LME - 1.550) x 0,024) x (srk(USD)) where
- Â -Â Â Â Â Â Â Â Â LME is average primary aluminium
price at London Metal Exchange in the month for
which invoicing of the energy deleivered is
carried out - Â -Â Â Â Â Â Â Â Â srk(USD) - average USD exchange rate
according to ECBs exchange rate list on the date
of invoicing - - BK
higher or equal to 0,00 EUR - Â
Obtained BK represents amount in EUR. - c)Â Â Â Â Â Electricity price above 2/3 of the energy
needed for production, i.e. above the quantity
established in the item 1. a) in equal monthly
amounts, KAP shall import or this price shall be
formed by free agreement between KAP and EPCG - d)Â Â Â Â Â Transmission of the electricity purchased
by KAP independently from import, shall be paid
at the price of 2,21 EUR per MWh. -
27Electricity price (continued)
- 3.    KAP-EPCG price relations in the period
2009 - 2010 - a)Â Â Â Â In the period 2009 - 2010 EPCG is obligated
to provide annual supply up to the level of
903.570 MW/h in equal monthly tranches, i.e. up
to 1/2 of the energy needed for production - b)Â Â Â Â Electricity price (CE) from the item a)
shall be established under the formula  CE
PC BK, where - Â Â Â Â Â Â Â Â PC initial price established under
the item 1b) (24,39 USD for MW/h converted in EUR
under the average ECBs exchange rate on the date
of invoice issuance. If conversion result is
lower than 20,44 EUR, price of 20,44 EUR for MW/h
shall be applied.) increased (decreased) by
increasing (decreasing) index of the energy price
on the Exchange in Leipzig for the period
01.01.2006 01.01.2009 ( i.e. 01.01.2006-01.01.20
10, for the year 2010). - Â Â Â Â Â Â Â BK - energy price correction in case of
positive deviation of primary aluminium price
from the reference value of 1.550 USD/t . - Â Â BK should be calculated according to the
following BK ((LME - 1.550) x 0,024) x
(srk(USD)) where - Â -Â Â Â Â Â Â Â Â LME is average primary aluminium
price at London Metal Exchange in the month for
which invoicing of the energy deleivered is
carried out - Â -Â Â Â Â Â Â Â Â srk(USD) - average USD exchange rate
according to ECBs exchange rate list on the date
of invoicing  - - BK higher or equal to 0,00 EUR
- Â
Obtained BK represents amount in EUR. - c)Â Â Â Â Electricity price above the quantity from
the item 6. a) (903.570 MW/h) KAP shall import or
this price shall be formed by free agreement
between KAP and EPCG. - d)Â Â Â Transmission of the electricity purchased by
KAP independently from import, shall be paid at
the price established by Energy Agency. -
28 29Environmental issues
- Impacts of operation of Kombinat
aluminijuma Podgorica on environment and health
of people are noted in Diagnostic report. Based
on that report, Report of the State Commission
from 1993, two M.A. theses and other available
expert reports and studies, it has been concluded
that technology installed at KAP is 30-35 years
old, and in that period there was no essential
changes except at the very beginning of operation
when red mud filtration system was improved.
During the period of UN sanctions KAP operated in
irregular conditions with stop-go system. This
unavoidably caused equipment damages (scrubbing
system of the Smelter Potline B etc.) and increse
of scrap. Cosequences in deterioration of
environmental quality reflect in deterioration of
the basic environmental segments of undrground
and ground waters, air, soil. Solving of the
problems stated understands activities in two
directions rehabilitation of the consequences of
the previous pollutions and prevention of further
pollution. - Proposal
- Government should undertake the activities for
rehabilitation of the consequences of previous
pollutions arised as the consequence of
Kombinats operation. - Future investor should prevent further pollution
and to propose investments intended for improval
of the quality of all environmental and working
segments at the site of KAP. - Section line should be established as the
result of current revision of environment in
order to define the line between the current
status and new obligations of the investor that
should be adjusted to the requirements of
European and world standards. - Precised exploring of the environmental status
shall be possible to do only as the result of
environmental due dilligence that is in the
course.
30 31Labor
- 2.746 emoloyees are employed in the primary
production which is the subject of privatization.
There are 389 invalids totally. 838 employees are
employed in KAPs Downstream capacities, out of
which 62 of them are professional invalids.
Amount for salaries of invalids in the primary
production paid by KAP in 2003 is EUR
2.994.971,28 (excluding salary amount for
invalids in Downstream capacities). This salary
amount represents 9,73 of the total KAPs salary
amount. - According to information from Bauxite Mine
their total number of emloyees is 1.400 out which
145 of them are professional invalids that should
be treated in the same manner as KAPs
professional invalids (in case decision of value
increse of Bauxite Mines is reached). - There is a significant number of redundant
labor as well as in other similar companies.
Taking into account the level of employment,
company does not have benefits from the diference
in average salary costs in Montenegro and Western
countries. Average salary in KAP is significantly
higher than national level. Issue of employment
level has been repeated by the potential
investors we talked to. Part of redundant
employees relate to invalids that are on the
payroll of the compyny
32Labor (continued)
- Proposal
- Issue of invalids should be displaced from KAP
and Bauxite Mine (if decision on value increase
is reached) i.e. Government should take over the
obligation after KAP/and Bauxite Mines/ make
complete revision of the certificates on degree
of disability with coordination of the Ministry
of Labor and Social Welfare, - Ministry of Labor and Social Welfare should
urgently propose amendments to existing law
regulations. - According to existing law regulations, it is
necessary to carry out optimization of existing
labor nad invalids, - For payment of costs arised by taking over of
obligations toward invalids, it is necessary part
of privatization revenue to be allocated to
social Funds.
33 34Contract with Anotech
- In 2000, seven year contract was signed
with Anotech company which includes the
obligation of USD 15 mio investment. Anotech
company has addressed to KAPs Board of Directors
with a demand to extend a contract on management
and reconstruction for the following 30 months. - KAPs Board of Directors has rejected a
request, evaluating that it is not in accordance
with the signed contract. - On the ocassion of its request explanation,
Anotech has stated that total value of
investments spent amounts USD 19,287.950,78 ant
that it exceeds the investment plan by cca
4,287.950 USD. Anotech claims that feasibility
study has been used only as a base for the
investment, and that it has been made on the
basis of physical examination of the equipment at
the Anode plant, and that equipment and spare
parts have been bought mainly at the european
market including credit indebtedness at very
unfavourable credit conditions. They have also
stated some other reasons because of which they
ask for the extention of the term for 30 months.
Based on the Work group attitude and a proposal
of the advisor it has been proposed - Proposal
- A new owner/owners of KAP, pursuant to valid
agreement, has the right to terminate the
contract between KAP and Anotech unilaterally,
after the privatization. -
35 36Downstream capacities
- Since 1999, downstream capacities have, for
the purposes of privatisation, been divided into
three plants Processing plant (strip casting,
strip rolling, foil rolling, packaging, pressing,
bicycle rims) Casting plant (billet casting,
billet forging) Wire and rope plant, FAK (wire
extrusion, wires for ground ducts). In the
previous period, an international tender for sale
of certain parts of downistream capacities was
launched 4 times. Interest has been shown only
for the plant of Al processing Prerada and for
the Casting plant. - Proposal
- GOM prefers privatisation of the primary
production and downstream capacities. - The potential buyers should be given an option
regarding buying downstream capacities, - In the process of potential investors selection,
investors which offer the business plan and
investment program for dowrstream capacities will
be given additional points according criteria for
evaluation of the offers, - As an option, downstream capacities should be
provided, through a commercial contract during
privatisation, with supply of required quantity
of Al (up to the installed capacities) if they
are not taken by KAPs buyer. The price will be
commercial within range to be proposed by the
Advisor.
37 38The Bauxite mine
- The Bauxite mine is the independent
company with different structure of ownership
(state ownes 31,38 of shares) which has signed a
longterm agreement with KAP (30 years) regarding
bauxite delivery However, there has not been a
contract on price relations between those two
companies for two years now. - The bauxite mines in Nikšic have been
working for more than 50 years. In the past it
has delivered bauxite to other parts of ex
Jugoslavia, independent States union and Romania,
since 1971 the only client of this company is
KAP. From KAPs standpoint, Bauxite mine is its
only bauxite supplier, thus, both subjects
completely depend on each other. - We consider that is it not good for KAP to
try to satisfy its needs for bauxite by
purchasing it outside Montenegro - Bauxite is the good of great volume but small
value thus, international transport and
manipulative expenses can increase expenses of
bauxite devilery largerly, especially at current
high transport prices. - Storage capacity of the Port of Bar limits the
possibility of bauhite import from the
international markets like markets of India,
Australia, Venezuela or Guinea. - Beside that, it is debatable that Bauxite mines
will not survive if faced with international
competition, and bauxite reserves should be
considred a resource which can not be used again.
- Hence, KAP has to continue relining on the
local bauxite inventories, both from economic and
social standpoint, thus resolving a question of
those two companies mutual relation. Considering
a specific structure of shareholders at the
Bauxite mines, inclusion of this company into the
range of a transaction should be predicted by a
combination, on of capital increase in the
company and purchasing of the existing shares
owned by the state. On the contrary, investor
should not be prevented from buying the existing
shares of private shareholders. By presenting
close economic connection and mutual dependency
between two companies, we have proposed the
Bauxite mine to be included into the range of the
transaction.
39The Bauxite mine
- Proposal
- Alternative 1
- Sale of minority block of shares (31,38 owned by
the Funds) with additional financing. Realization
of this model understands making a decision on
additional financing at the Bauxite mine general
assembly, to the amount of EUR 8 mio, including
the following conditions set by majority
shareholders - 1) The Bauxite mine and KAP to enter the
privatisation process as two separate companies .
- 2) to define bauxite price LME formula
depended, or the bauxite price to be fixed, that
is, EUR 26 - 3) the average salary amount to stay at the
same level at least . - 4) the same social program and environmental
protection conditions as for KAP . - 5) Investment and business plan for the period
of 5 years to be proposed by the investor - Alternative 2
- Sale of minority block of shares (31,38 owned
by Funds) - Possibility of KAPs buyer to continue buying
shares at free stock market.
40Target investors group
41Target investor group
- Several types of investors could be potentially
interested in investing in KAP aluminium
producers, trading groups, different financial
investitors. . - The process should be designed in order to
promote the candidacy of the preferred target
investor type, but should also take into account
the market reality . - In order to maximise the number of candidates, we
propose to open the process to both strategic
investors, financial investors and consortiums. - The main reason behind the unusual extension to
the financial investors is related to the risk of
expected low competition among strategic players,
while the potential presence of the financial
investor will create the risk for industrial
players of unexpected competiotion. - Nevertheless, we propose to ectablish a quality
control of potential investors through
appropriate definition of the eligibility
criteria, in order to eliminate non suitable
parties, unable to fulfil Government of
Montenegros expectations related to the
transaction or to effectively close the
transaction. - On following pages we briefly present main
characteristics of those categories of investors.
42Target investor group Strategic investors
- The investors of this type are from the
aluminium sector, (i.e.the same business as KAP)
are hands-on, active managers, able to handle
business and strategic issues with speed. - Compared to other types of investors, strategic
investors have a longer term investment horizon
and are ready to pay a higher price, provided
they are given the operational and management
control of the target company. - The main advantages of involving strategic
investors are the following - Managerial, commercial, financial and
administrative support and discipline - Introduction of new technologies and technical
expertiese, as well as the experience to respond
to increasing competition - Providing financing to support the future growth
- Securing the strategic investor for KAP shall
increase the profile of the privatisation
programme internationally, which will be useful
for the future trade sales. - In theory strategic investors may be mindful of
future exit routes, but follow the market far
less frequently than financial investors and are
less senstive to market volatility or liquidity
issues.
43Target investor group Financial investors
- Portfolio investors are in the business of
managing large funds, which invest in a
predetermined risk class of assets. Investment
decisions are made on a risk-return basis, taking
into account the economic and political risk of
the country in question as well as the other
risks, growth prospects, liquidity and volatility
of the target asset. - Typically, this type of investors exercise
passive management control through the voting
process and are rarely hands-on managers. The
ultimate purpose of such investors is to divest
in the short or medium term to realise their
profits. Some portfolio investors are specialised
in managing distress situations, such as KAP, and
those will be our main target. - Private equity investors are a specific group of
medium-term portfolio investors. These are
typically investment funds providing medium-term,
committed share capital, to help unquoted
companies grow and succeed. Private equity is
money invested in exchange for a stake in the
company and, as shareholders, the investors
returns depend on the growth and profitability of
the company. - Given the complex situation of KAP and the fact
that it is beneficial to increase interest in its
privatisation, it is recommended that portfolio
investors and private equity groups are allowed
to participate in the sale process, either alone
or in consortium with a third party. They will be
required to demonstrate their capacity to bring
relevant technical experience and know-how in the
production and sale of aluminium in collaboration
with third parties.
44Target investor group Financial investors
(contd)
- International institutions such as the EBRD and
the IFC (International Finance Company, World
Bank Group) could be invited to participate in
the privatisation alongside the strategic
investors. Typically, these institutions invest
in privatised companies in consortium with
strategic investors and on the same
price-per-share terms. - The involvement of an international institution
in the privatisation may be beneficial for both
the Montenegrin authorities and potential
strategic investors. The presence of an
international institution would upgrade the
status of the privatisation tender and increase
the visibility of the transaction. - From the investors point of view, the
participation of an international institution may
be perceived as a protection against the risk of
political interference and as a guarantee that
the vendor would meet all contractual
obligations. Such a participation may even result
in a higher credit rating of KAP and in an easier
access to local and international debt financing.
On the other side, the Government should be aware
that some strategic investors may turn down the
proposal to team up with international
institutions for various reasons. - We recommend that international institutions
should be invited to participate in the
privatisation process, but the investors should
be free to decide and/or approach on their own
the international institutions that will express
interest in KAP.
45Target investor group Consortia and SPV
(Organization for special purposes)
- In order to offer prospective strategic and
financial investors a larger degree of
flexibility and, in particiular, to encourage the
participation of those candidates who are not in
a position or prefer not to bid on a stand-alone
basis, offers submitted by consortia or
special-purpose vehicles (SPVs ) should be
accepted. - In addition, it is possible that the
pre-qualified bidders on the basis of their
stand-alone participation in the tender will
create consortia of SPV before the submission of
binding offers. - Consortia, consisting of different Industrial
and/or financial investors, will be allowed to
participate in the tender only under the
condition that at least one member of the
consortium 1) fulfils all the relevant criteria.
or 2) has proven experience in production and
sale of Al and proven financial ability to
realize investment program. - All consortium partners will have to be jointly
and severally liable.
46Eligibility and selection criteria
47Eligibility criteria
- Based on our experience in similar tenders
world-wide and specifically in the region of
Central and Eastern Europe, taking into account
the specifics of the privatisation of KAP, we
recommend the eligibility criteria listed
further. - Their main purpose of the eligibility criteria
is to limit the number of bidders to those being
serious in their participation in the tender,
such with relevant experience and capacity to pay
the purchase price. - Experience and financial ability
- In order to secure the sound development of KAP,
we believe that the potential strategic investors
should be present in the aluminium industry as
producer. Potential financial investor should
have sufficient experience of investment fund
management and should demonstrate the ability to
provide adequate technical and managerial
capacities. Bidders will be requested to provide
details related to their involvement in the
aluminium business and of any existing
relationships, if any, they might have with the
companies. - Strategic investors will be required to have a
minimum of 3 years experience in the production
of aluminium. - Financial investors should be in operation of at
least 3 years and should prove appropriate
technical experience and know-how in the
production and sale of aluminium in collaboration
with third parties.
48Eligibility criteria (continved)
- The incoming investor of KAP will be undertaking
several substantial financial obligations, not
only to pay the purchase price but also to settle
restructured debt and to undertake an investment
program. In addition, since the Government is
concerned to ensure the survival and long term
development of KAP and associated businesses, the
financial capacity of bidders or their
shareholders is of primary concern. - Strategic investors total annual production
should be no less than 120,000 tonnes of
aluminum - Financial investors will need to demonstrate a
minimum funds under management of at least EUR
500 milion and to prove experience in Al Business
in a way acceptable by Commission. - If a producer is a consortium, at least one
member of a consortium should have Al production
of at least 50.000 t annually. Consortium should
provide acceptable bank guarantee (Intention
letter of A bank) proving the ability of a
Consortium to realize the investment program to
the amount of at least EUR 120.000 mio, including
solidary responsibility of all consortium
members. - The incoming investor is obliged to
comply with all ecological, health, protectional
standards of the Republic of Montenegro and
Curopean Union and to Implement Ecological
action plan. - Ownership structure
- The investors will be asked to provide a
statement with respect to their ultimate
shareholding structure and all necessary
documentation demonstrating those statements.
49Evaluation criteria
- Unlike eligibility criteria, where potential
bidders are judged on their own merits, not on
transaction-related elements, the evaluation
criteria applied to the submitted bids were
designed in order to judge the bidder on
transaction related elements, in the most
objective and indisputable manner. - After the validity of all the submitted Bid
Packages is assessed, valid bids shall be
evaluated according to the following proposed Bid
Scoring System (BSS). - Purchase price
- 5 year investment program
- Option of purchasing of Dowstream assets
- Participation in purchasing of Bauxite Mine
shares - Social aspect
- Proposed model for electricity supply
- Changes in purchase agreement
- Purchasing of shares of minority shareholders
50Evaluation criteria (continued)
- The selection criteria described above were
designed to ensure simple, fair and transparent
evaluation of the bids while corresponding to the
objectives of the Government as well as the
approach to key issues. - Other, non scored obligations will be defined by
Tender Rules. -
-
51Section 6
- __________________________________________________
_____________________________ - Tender process principles
52Tender process principles
- Transparency
- The Government will be judged by a domestic and
international audience on their capacity to run a
transparent sale process. - Selection criteria should therefore be meaningful
and easily measurable, ensuring that final bids
can be objectively compared. At the same time
through the eligibility criteria the Government
cans ensure that only the parties fulfilling its
objectives can participate in the tender. - A highly transparent process should also assist
in securing the highest quality of potential
bidders. - Efficiency
- A speedy and efficient selection process is a
pre-condition for a successful sale - As the bidding process is expensive for bidders
and can, if significantly drawn out, have a
negative impact on operations at the companies,
it is vital to conclude as rapidly as possible
with as little disruption as possible. - Fairness
- All potential bidders should be guaranteed equal
access and equal information in the process as
the starting point is not necessarily the same
for all parties. Some of them already have a well
developed knowledge of the company. - The process must ensure full access to
information and provide the time necessarily for
all parties to assimilate it. - The fairness of the process will also have an
impact on the quality of bidders and in this
light we would stress that process should not
only be fair but should be seen to be fair by
participants and observers.
53Request of Expression of Interest and
pre-qualification phase
- The launch of the tender will be officially
announced by the Agency through an invitation to
express interest published in the national and/or
international press and on the web site of the
Privatisation Agency. - The purpose of this phase is to guarantee the
seriousness, the technical capability and the
financial strength of the competitors. This stage
aims at pre-qualifying potential investors which
comply with specific criteria. Such criteria are
designed to ensure - The integrity and transparency of the sale
process, and - The seriousness of undertakings given by the
investors in terms of investment and development
commitments, the bidders management capabilities
as well as payment of the purchase price and
capacity to close the deal with Major Creditors. - Bidders will have three weeks to express their
interest from the launch of the tender. - Bidders which will have expressed their interest
for the acquisition of the Shares and have been
found as satisfying the prequalification criteria
on the basis of demonstrated evidence, will be
invited to purchase the Tender Documentation and
thus participate in the next stages of the tender.
54Circulation of the Tender Documents
- A Notice of Eligibility, Confidentiality
Agreement and Tender Documents Fee Invoice will
be sent to Pre-qualified participants who fulfil
Eligibility Criteria - The confidentiality agreement will set out a
number of obligations concerning respect of the
confidentiality of information to be received and
restricting the right of use or otherwise
damaging the value of the assets. - Upon payment of the amount for purchasing of
Tender Documents and signing of the
confidentiality agreement, the Tender
Documentation will be made available to the
pre-qualified bidders. - The Tender Documentation consists of (a) the
Information Memorandum, (b) the Tender Rules, (c)
the draft Sale and Purchase Agreement, and (d)
other information and documentation as may be
needed. The pre-qualified bidders should be given
14 days in order to analyse the Transaction
Documentation before the commencement of the data
room phase. - Qualified Tender Participants will be encouraged
to submit drafts of the SPA with any amendments
they propose to the Advisors prior to the Bid
Submission Deadline for clarifications and
consultation. If the Tender Commission agrees
that a proposed amendment is acceptable, a new
draft SPA shall be circulated to all Qualified
Tender Participants including the amendment
agreed.
55Due diligence
- As data room contains sensitive information to
add to candidates understanding of the business
but which was not included in the Information
Memorandum, their availability to candidates will
be governed by rules which are fixed in advance
in the instructions to bidders document. In
parallel with site visits, data room will be made
available to candidates and their advisers - All bidders will bid on the same set of
Transaction Documents and terms and conditions.
This will ensure comparability of offers
transparency of process and crucially maximise
the Government of Montenegros bargaining power
in negotiations with the selected bidder. The
final stage will consist of the submission of
final the Bid package. - The due diligence phase shall be governed by the
Tender rules. Participants are to submit an
Access application, upon which within 7 days,
participants shall be notified on the precise
dates of investors access to the data room, site
visits and management meetings.
56Negotiations with the Major creditors
- The DRA imposes significant requirements in the
event of any sale of the shares of KAP - According to the DRA, KAP must notify and request
the approval of the Major Creditors reasonably in
advance of a proposed sale (whether by
privatisation or otherwise) of a material portion
of the stock or shares or assets of KAP, and of
the likely terms of the proposed sale. - The completion of the sale shall be subject to
the prior approval of two of the three Major
Creditors. - KAP may proceed with a sale without the approval
of the Major Creditors if the Restructured Debt
and interest is paid off in full as a condition
to the completion of the sale. - KAP may also proceed without prior approval if
the sale does not result in loss of control by
the present shareholders of KAP, provided that if
two out of three of the Major Creditors has
reasonably objected to the sale and the Major
Creditors so require, the fraction of the
Restructured Debt which corresponds to the
proportion of the shares or assets sold is paid
off. - KAP may also proceed without prior approval and
no repayment if the two of the three Major
Creditors object unreasonably. - Qualified Tender Participants shall be given the
opportunity to negotiate the terms of the DRA
directly with the Major Creditors and to seek the
approval of the Major Creditors to the proposed
Bid. It will be requested to state, as the part
of his final bid, that bidder arrived at an
agreement with the Major Creditors, allowing the
conclusion of the transaction.
57Bid package and submission of bids
- The precondition to submitting a bid by qualified
tender participant is the procurement and
submission of a bid bond. The Bid Bond may be
cashed in by the Agency provided the bidder does
not fulfil certain obligations arising from
submitting the bid, i.e. does not sign the SPA,
does not pay the purchase price, etc. The amount
of the Bid Bond is set at EUR1,000,000. - The bid package will be submitted in both English
and Serbian languages (except for certain
supporting documents) and for some of the
documents, in order to speed up the following
stages of the process, will also be required in
electronic form. - Bid package should consist of (Bid form
shall be explained in detail in Tender Rules) - Identification/Qualification Documents with all
elements of financial reports, Bid Bond, proof on
sufficient finacial resources, identification
details and contacts etc., - Bid of purchase price with proposal for debt
addressing, - Investment and business plan for the 5-year
period including Downstream assets and possibly
Bauxite Mine, - Environmental and occupational protection program
- Social program
- Electricity supply program
58Timetable
59Tender process overview
- Launching of a public invitation for the
submission of expression of interest - Pre-qualification of potential investors
- Sale of tender documents to the pre-qualified
potential investors - Development of due diligence by pre-qualified
investors - Submission of final binding offers
- Selection of the preferred bidder(s)
- Negotiations and signing of the transaction
documentation - Transaction closing process
60Privatisation timetable