MET mulls IPO one year after management buyout
It has been a year since MET Group’s management buyout. While not triggering any significant changes in the company’s strategy, the move certainly brought about a substantial shift in mindset, MET Group founder, CEO and majority shareholder Benjamin Lakatos said in his interview with Portfolio. By his own account, at the end of last year, the company articulated that they did not rule out the option of going public, on a group level. An eventual public listing of the company may produce a tremendous change, but, for the time being, it is still only a vision.
It’s been almost exactly a year since the management announced its intent to purchase MET from its previous owners. Looking back, how did this step fit into the company management’s concept and into the broader industrial environment?
Benjamin Lakatos: For a number of years now, a consolidation process has been apparent on the European energy market which, to put it simply, is characterized by decreasing margins and companies searching for the way forward. The world is presently undergoing extraordinary changes, and global trends like the technological revolution, digitalization, and the spreading of renewable energy sources are having a strong effect on the energy sector as well. But to me it feels like not even the largest companies have found the best way to react to these trends.
That’s the world that MET found itself in. In line with our strategy, we see the consolidation process as a market opportunity in which we intend to participate as a consolidator. We have been continuously growing over the past ten years, and not just because we can react quickly to changes. This ability has really been shaped over the past ten years, when we prepared MET Group to be able to successfully participate in this consolidation. This continues to require four conditions to be met: suitable human resources, suitable systems (where we still have some developing to do), physical positions (which is why we started purchasing companies), and financing.
What is currently the greatest challenge?
In our present operations, capital financing has proven to be the bottleneck. Although we are proud to report that we can access international markets in credit financing and the MET Group is able to provide global solutions for everything that can be solved by credit financing, capital financing and the company’s capital has not yet reached the level we would be comfortable with. Our balance sheet isn’t quite where our main competitors’ are. Buying out the management was partly due to a stronger need for capital, but this did not in itself solve the issue. Right now, it’s only the management that has put money into the company, and the management does not nearly have the necessary amount of money. That’s why we started negotiations aimed at ensuring that the company has enough capital even before we bought out the management, and we have continued these negotiations ever since. Over the course of the past year, we have both tried to provide for this capital cover and have devoted the available funds to implement our strategy, which also helps in acquiring the necessary capital.
What specific goals can additional capital infusions serve and what forms can they take?
The company structure was changed as a result of the new strategy we laid down at the end of last year: our activities were split into three divisions: asset management, European sales, and trading. Capital is mainly required for asset acquisitions, though we see numerous possibilities for consolidation in the other two areas as well.
Can you describe the ideal partner you are looking for?
We are constantly negotiating with investors with international clout in the interest of realizing European-level strategies. Capital can come from financial investors, funds, or strategic investors. An initial public offering (IPO) is currently not an option, though it can’t be ruled out in the mid-term.
Our first goal is to create a diverse portfolio in Europe. The majority of our assets are located in Hungary, though we recently announced a Serbian purchase and it is very likely that we will be announcing yet another country, another foreign acquisition this year. In the case of foreign purchases, a solution would be to involve partners; it is more beneficial to enter new countries with local partners anyway, which is why we developed a partnership with NIS in Serbia. Another possibility would be to involve ownership partners into the MET Group; we are already holding the appropriate negotiations and have received concrete offers. As regards this issue, MET could be interesting to companies that are not yet present but want to enter the European market - we can act as a very good springboard for these types of companies. We are weighing the options and can already see that in absence of such an agreement we will be unable to progress on the European scene as quickly as we would like. However, the question of when the suitable time will come and who our partner will be is as yet unanswered.
So the long-term plans include listing the company on the stock market?
At the end of last year, we determined that we wouldn’t rule out the possibility of an IPO at the group level, but it is almost certain that this will not take place in the next three to four years. Before this step, we need to develop new partnerships that can bring capital to the group. Today, the management fully agrees that this is the way we want to go. However, since we want to remain flexible as regards market developments, we agreed that an IPO would be a possible option and not a set goal. So we’re not saying we will be listed on the stock market in five years, but rather that if the market develops the way we think it will and if this will be the best possible solution, we will be willing to take that step. If it happens, it will mean a huge change for us. But currently it is just a dream, and the problems of tomorrow and today are far more interesting.
What specific changes has the change in ownership brought to the MET Group in the past year?
Theoretically nothing, but actually quite a lot. The biggest change was psychological. After many members of upper and middle management became owners, they became so enthused that ideas literally started pouring in. The new approach that the change brought about also resulted in employees paying more attention to each other; for example, they don’t generate unnecessary work for each other. When a department criticizes another department, people are more ready to believe that the intent is to bring about positive changes. Employee motivation was quite good beforehand as well, but the change in attitude resulted in enormous progress in the efficiency and results of communication. I myself was surprised at the degree of the changes.
How did the partners react to the ownership change?
So far, we have been talking about investment partners. However, MET’s business activities obviously greatly depend on both business partners and bank financing. The big question was how they would react when a strong brand like MOL left the ownership structure. Although everybody knew that MOL hadn’t participated in managing the MET Group before either, its presence did provide a sort of added value. Buying out the management brought about that moment when all our business and financial partners asked themselves the question of how they would see us in the future. Since this is not a sport where you receive a score and everybody votes with their money, I think the result is pretty obvious. Our investment partners used their money to decide whether they would be willing to continue doing business with us and maintain our credit lines. Based on this, there has been no change, and we even managed to develop in many areas. Our financing partners have also voted, as a result of which we can maintain our financing lines and were even able to increase them. MET’s finance team also played an enormous part in this. The fact that the management, which has the most information on the situation, decided to invest its own money and purchase the offered shares can be understood as a vote of confidence.
On the strategic level, what changes did buying out the management result in?
There were no great changes to our strategy. Buying out the management resulted in changes in two respects: it increased the motivation of middle management and gave the green light for negotiations regarding capital infusion. Our strategy is susceptible to change mainly due to external factors. We are progressing quite well along our designated path, are able to continuously increase sales revenue, and I think we will be able to maintain this position in the future.
In addition to the fact that consolidation is taking place, we feel that the market is headed in a direction where size will again be determinant. Since we announced our strategy in 2012, our activities have always focused on growth, which means that we are willing to make sacrifices in return for growth in other areas. We are present in a number of markets; we are very small in some, but there are others where we are sitting at the table. And the question of where the whole of the MET Group is situated as regards size is a question of perspective.
If I understand correctly, one of the most exciting changes is the expansion of the asset portfolio. Are you focused mainly on neighboring countries?
Not necessarily. For example, I deal a lot more with Italy and Spain than Eastern Europe. We consider the successful Serbian wind energy project to be a strong weapon in our arsenal, which also shows the strength of the MET Group. It wasn’t an easy case, especially because it is always difficult to take action in the form of a partnership. This is a medium-sized renewable energy project, where MET was able to achieve a position that allowed it to start the work with a 50-50 share together with Serbia’s largest company, along lines clearly laid down. Moreover, even state-owned shareholders accepted us, which gives us added security. NIS’s controlling owners is Gazprom, the giant owned by the Russian state. However, we provide our financing from Western European markets. It is not that easy to balance these differences and distances, but MET is now able to.
Would you also like to participate in the European business of overseas-sourced LNG?
Europe is unequivocally in the focus, which doesn’t mean that we won’t dare to expand outside the continent’s borders. There is a single point of contact between MET’s strategy and the United States energy market: LNG. It is almost certain that USA will become a surplus producer, and the intent is strong to increase LNG sales to Europe and Asia. MET has strong gas sales potential in Italy and Spain. As a result, we can provide a purchase position on the international LNG market and can sign long term contracts. These contracts provide advantages for sellers too, as they guarantee a sort of sales revenue system and makes it easier to plan their investments.
I would also note that it seems that the forecasts we made five years ago about LNG are coming true: signs indicate that LNG markets are developing into a global market, and so we see a high probability that Europe will play the leading role in defining the market’s international prices. Over the past eight years, Asia, and primarily Japan and Korea, played these roles, where gas prices are about twice that in Europe. However, Europe has now managed to become a balancing player on the market, just as for example Saudi Arabia provides the flexibility of oil production on the production side. Even if it hasn’t yet taken over the role of determining prices, I consider it possible that the European gas market will subsequently pick up or shed off unnecessary overproduction or underproduction on the global market.
At a recent Swiss referendum, voters decided to revoke tax discounts from international companies registered in Switzerland starting from 2020, meaning foreign companies would have to pay the same amount of taxes as domestic companies. As a company based in Switzerland, how does this affect MET?
This won’t bring about any significant changes at MET because the effects of the referendum greatly depend on the individual cantons. We are based in Zug, where the changes are expected to be small. Tax rates differ between the cantons, and Zug did not have any substantial sales revenue from Swiss companies. I would like to note that since the company profit tax rate was reduced in Hungary, Hungary has become more competitive than Switzerland: MET Group’s Hungarian subsidiaries currently enjoy lower company profit tax and dividend tax rates than Swiss subsidiaries.
All in all, we feel good in Switzerland and plan to stay for the long term. One of the main reasons is that as a Switzerland-based company, it is easier to access international money and capital markets than in any other country. If you show up at a large international investor coming from an Eastern-Central European country, you come across looking like something exotic, as they are usually versed only in English, Swiss, and maybe Liechtenstein law. The other reason is less tangible but very significant. I myself realized just about a year after what the main benefit of moving the company to Switzerland was. By putting a Swiss flag on the company, we created a logo, a brand, which the whole world viewed differently. A good example is recruitment: you can’t even get the same people in Vienna. The large international hubs are the most attractive for professional career paths: New York, London, Singapore, maybe Frankfurt, Paris, and Switzerland is very strong.
Budapest is also quite high on the list. During job interviews, we frequently met with the youngest generation, fresh out of college, asking us: Is it possible to work in Budapest, or will there at least be some trips there? This is clearly a plus for us. The city is known as a party venue, a good place to live where everything is affordable, and services are of high quality. This was the same 15 years ago, but now young people across Europe know about it. That is how much perception counts.