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Cablegate: Pre-Election Telecom Privatization Creates Stock Market

VZCZCXRO1851
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0864 2621126
ZNR UUUUU ZZH
R 191126Z SEP 07
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 8148
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS ZAGREB 000864

SIPDIS

SENSITIVE

SIPDIS

STATE FOR EUR/SCE

E.O. 12958: N/A
TAGS: ECON EFIN HR
SUBJECT: PRE-ELECTION TELECOM PRIVATIZATION CREATES STOCK MARKET
FRENZY


1. Summary: The further privatization of Croatian telecom (HT), in
which Croatian citizens can buy shares at a fixed and probably
discounted price, has set off a stock frenzy in the country.
Croatians have been lining up to buy shares in the company, certain
that their government will price them at a sufficient discount to
ensure a quick gain. This new-found euphoria for securities has
been buttressed by last year's partial privatization of the energy
company INA, in which citizen investors realized a first day gain of
nearly fifty percent. Investor confidence is further bolstered this
time around by the fact that this privatization precedes
parliamentary elections, thus providing a strong incentive for the
Government to underprice HT shares. End Summary.

2. From September 17 to 27 Croatian citizens can register to
purchase shares in the latest round of the privatization of the
national telecoms provider, HT. The Croatian government is a
minority shareholder in HT, with Germany's Deutsche Telekom holding
51 percent of shares. In this latest offering, the GOC is selling
up to 23% of the shares in the company at a price of between HRK 245
and HRK 320 per share (5.25 HRK = 1 USD). The Government will set
the final sale price for the shares on October 1, days before their
simultaneous October 5 listing on the Zagreb and London stock
exchanges. Croatian citizens are eligible to purchase up to HRK
38,000 worth of shares. The Government has also committed to give
an additional share to each shareholder for every 10 shares held for
one year.

3. The privatization of HT has sparked a frenzy across the country,
with people from all walks of life standing in line for hours to buy
shares. Stock ownership is not widespread in Croatia and for most
of those queuing to buy HT shares, this is their first foray into
the market. One reason for the excitement is last year's
privatization of the national energy company INA, in which the
Government sold shares to citizens at what proved to be a
substantial discount. Those who bought INA shares last year
realized a 50 percent gain the first day of trading. Convinced that
past is prologue and that a government facing elections in two
months would not allow thousands of voters to lose money, most
Croatians are certain that HT will prove a winner. Banks have also
jumped into the game, offering credits at 10 percent interest for HT
share purchases.

4. The Government's objectives in the sale are several and, if all
goes according to plan, the timing is quite propitious. Proceeds
from the sale of HT are to be used to pay a final installment of a
state "debt" to pensioners (these are pension arrears that were not
paid through the 1990s and which the Supreme Court mandated the
Government to repay several years ago). With one pensioner to every
one and a half people working, pensioners are an important voting
block. Selling shares at a discount and guaranteeing quick gains
among voters (even among these very same pensioners who are taking
loans against their "debt" repayments to buy shares) so soon before
an election can only help the ruling party. Finally, this public
IPO is also a way of partially atoning for the sins of the murky
privatizations of the 1990s, in which the well-connected, but not
necessarily the well-qualified, were able to acquire vast wealth in
a short time, leaving a decidedly negative attitude towards
privatization among the public.

5. COMMENT: The privatization of HT is not without risks. Some
analysts have pointed out that HT is quite different from INA, that
it already has a majority shareholder and that it is operating in a
much more competitive industry. HT's long-term profitability is
anything but certain and the practice of taking loans to buy shares
only increases the risk that some investors will incur losses on the
transaction. Politically, the deal also gives an opening for the
opposition to charge the Government with pandering to voters at the
expense of the state should the share price turn out to be low. In
the short term, however, the intense demand for shares seems almost
certain to drive their price higher and most voters will probably
happily be pandered to if the result is a nice tax free gain on
their investment. END COMMENT.

BRADTKE

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