Earlier this month, July 2014, the Greek Parliament gave its approval to a law providing for the privatisation of a part of Public Power Corporation S.A. (PPC), the dominant producer and provider of Electricity in the country (as well as still 100% parent company of the Greek Transmission System Operator). The privatisation shall be preceded by a spin-off of certain assets of PPC, which shall correspond to 30% of the company’s’ production asset base and 30% of its customer base. Those assets shall then be transferred to another company. After the completion of the spin-off, PPC S.A shall acquire the total number of shares pertaining to this other company. This first part of the privatization process shall follow the provisions of law 2166/1993. This law foresees specific tax exemptions in order to facilitate the creation of big business units, the most important of which is exemption from tax obligations with reference to the property transfer that occurs as part of the transaction.

The last phase of the privatisation process consists of a purchase of those shares through an open tender procedure.

Especially with regards to the open tender procedure, where the highest bidding shall determine the price for the shares, the law contains interesting provisions. Article 2 paragraph 4 of the law is intending to set a minimum value, which shall be acceptable as a price for the shares in question. The criterion chosen by the legislator raises some questions.

According to the above mentioned article 2 paragraph 4 of the law the price to be paid for the shares of the new vertical integrated electricity company shall not go below the book value of the transferred assets. The book value shall either result from values listed on the first balance sheet of the new company after the completion of the transfer or from those reflected in a provisional balance sheet that will be accomplished for the purposes of the transfer, if at the time of the purchase a first balance sheet is not yet available.

The usage of book value as a criterion for the determination of the price in a share purchase transaction can be at least questionable. There is general accord in business valuation law that book value can hardly be decisive and even helpful when it comes to the valuation of a company in the context of a mergers & acquisitions transaction. Balance sheets are being composed conservatively and thus tend to reflect values that do not correspond to the values that market based or other methods such as the widely accepted discounted cash flow method (DCF) would produce. Conservatism with regards to the valuation of assets on the balance sheet is enshrined as a principle of law in Greek law.

However the legislator stipulates that in the case of PPC privatisation book value has to be determined according to the IFRS methodology. As it is generally known IFRS valuation is based on the fair and true value principle. Even so, the starting point here (within the IFRS frame) is the historical cost and one has to make then the way from the single asset – asking whether its value has been impaired or increased – to the company in order to state the value of the latter, whereas there is a widespread principle of business valuation law that the reverse course – from the company to the single asset – is the right one to take. From that perspective it remains rather doubtful whether book value can accurately and fairly reflect the value of a company. This reluctance as to the significance of book value in the course of mergers & acquisitions transactions corresponds with the general standpoint of the Greek supervisory authority of the accounting profession.

Of course there is one question whether book value can be decisive and another whether it can serve as a minimum value.

The latter could prove problematic with regards to listed companies such as PPC S.A. A series of court decisions, notably in Germany, have established the principle that in certain transactions market value of listed companies, as shaped especially in the stock market, shall be the minimum level of value. If such a principle were to be accepted as of importance in the case under consideration, any valuation would have to compare the result of the book value with the result of a market based valuation method.

An orientation on the book value, even as minimum price-level could finally raise questions also from the perspective of privatisation law. A recent decision of the court of audit pointed out the obligation of the State to a sound financial and budgetary management. The Greek State is in this case the majority shareholder of PPC S.A. The above mentioned constitutional principle could become of importance in case the final price for the transaction equates the book value of the company’s’ assets but falls short of its true value (whether this is to be calculated by using the market value of the company’s shares or another approach).

For further information please contact:  Stavros Kitsakis – [email protected]