Polish State Rail Seeks Up to $518 Million From Cargo IPO

Polskie Koleje Panstwowe SA, the Polish state railway, seeks to raise as much as 1.6 billion zloty ($518 million) from the sale of its cargo unit in central Europe’s biggest initial public offering in almost a year.

The railway is selling as many as 21.7 million shares of PKP Cargo SA, the European Union’s largest rail freight company after Deutsche Bahn AG. The maximum IPO price was set at 74 zloty a share and bookbuilding will end on Oct. 22, according to a prospectus published today. Cargo will start trading on the Warsaw Stock Exchange on Oct. 31, becoming the EU’s first listed rail freight company.

“The sale should attract solid demand as the company is a good proxy for an economic revival in Poland and there are no companies of this kind listed on the bourse,” Dawid Czopek, who helps manage the equivalent of $2.1 billion at Warsaw-based BRE Wealth Management SA said by phone today. “PKP Cargo is also a restructuring story with an upside potential.”

PKP has sped up asset sales in past years to cut 4 billion zloty of debt. Cargo’s IPO is the largest in Poland since Alior Bank SA’s 2.1 billion-zloty sale in December and comes at a time when Warsaw’s all-share WIG Index trades near the highest level in almost six years. Meridian Properties NV is ending bookbuilding in a $230 million IPO today and Poland will offer a stake in power utility Energa SA later this year.

Price Range

The price range for institutional investors was set at 59 zloty to 74 zloty a share, according to three people familiar with the plans who asked not to be named because information isn’t public. Piotr Rusiecki at PKO Bank Polski SA, which helps manage the offering, declined to comment on the range at a press conference in Warsaw today.

Cargo may see its costs fall next year after Polish railroad operator, PKP PLK SA, proposed cutting access fees by 20 percent. Cargo pays PLK about 1 billion zloty annually.

“Even though the IPO pricing isn’t too high, especially that lower access fees will boost profit, I’d expect the final price to be near the lower end of the range,” Andrzej Blachut, head of emerging-market equities at Zurich-based Swiss & Global Asset Management said by phone. “The company is overgrown, you’re buying a lumbering giant, while its market share is shrinking as new motorways draw traffic away from rail.”

First-half net income at Cargo, which cut its workforce by 39 percent from 2008 to 26,493, slumped 44 percent to 76.8 million zloty as revenue fell 9.2 percent to 2.29 billion zloty amid the country’s economic slowdown, it said in the prospectus.

Keeping Control

PKP will keep at least 50 percent of Cargo and may cut the IPO size to 20.9 million shares to issue stock to employees as part of a deal with unions, according to the prospectus. The railway won’t sell further shares for 180 days after the unit’s bourse listing and may later offer an additional stake or allow Cargo to raise capital while keeping control of the unit, PKP Chief Executive Officer Jakub Karnowski said.

Cargo had a 60.3 percent share in the local market in 2012 and controlled 8.5 percent of rail freight in the EU, it said in the statement. That compares with DB Schenker’s 28 percent and 5.4 percent shares in the EU and Poland, respectively. Hard coal shipping accounted for 43 percent and building materials for 14 percent of its total freight.

The Warsaw-based company, which holds licenses to provide services in Slovakia, the Czech Republic, Germany, Austria, Belgium and Hungary, will continue expansion abroad and may consider takeovers of foreign competitors to quicken growth.

Cargo management will propose spending 35 percent to 50 percent of consolidated profits on dividends, according to the prospectus. The European Bank for Reconstruction and Development will buy a stake of at least 5 percent in the IPO.

Goldman Sachs Group Inc., Morgan Stanley and PKO are joint global coordinators and joint bookrunners in the IPO. Ipopema Securities SA, Raiffeisen Centrobank AG and UniCredit SpA are joint bookrunners, while Dom Inwestycyjny Investors SA and Mercurius Dom Maklerski SA are domestic co-bookrunners.

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