Warsaw, 4 March 2019
Statement by Jakub Karnowski
Today, the Regional Prosecutor's Office in Lublin has broad charges against in connection with a transaction involving the takeover of shares in the Czech railway carrier AWT B.V. by PKP Cargo in 2014-15. The allegations are absurd: they have no relation to reality or to my role in the process. Therefore, I would like to make the following statement:
AWT B.V. purchase transaction by PKP Cargo
- In the years 2012-15, I was Chairman of PKP Cargo's Supervisory Board. The Supervisory Board made a collective decision on the matter at issue. Except trade unions, all Supervisory Board members , including independent members appointed inter alia at the request of the EBRD, voted in favour of the resolution.
- The Management Board of PKP Cargo hired a professional consulting consortium consisting of teams of the Brokerage House of PKO Bank Polski, Ernst Young (currently EY), Weil, Gotshal & Manges (now WGM) and technical advisors for the purposes of conducting the AWT purchase process. The total of approximately 154 people participated in the process – which lasted about a year.
- After the transaction, an independent external auditor, PWC, at the request of the Management Board of PKP Cargo prepared a detailed 180-page report entitled „Overview of the acquisition process by PKP Cargo S.A. of shares in Advanced World Transport B.V.”, which was published on 2 July 2015. PWC confirmed that PKP Cargo's transaction process was in line with market practice, paying particular attention to the wide scope of expert support and the comprehensive nature of due diligence reviews of companies from the AWT Group. According to PWC: „the number and scope of external advisors' responsibilities and the scope of involvement of internal PKP Cargo SA teams in the transaction process shows a conscientious and prudent approach to the process.” „The AWT due diligence process was comprehensive in terms of the areas examined and the involvement of advisory teams, which proves that PKP Cargo attached great importance to minimizing the risks associated with the acquisition of AWT BV, and strived to obtain as much knowledge as possible about the subject of the transaction and the market on which it operated„(quotes from the report).
- The price paid by PKP Cargo for 80% of shares in AWT B.V., namely EUR 103.2 million (PLN 445 million), was nearly 40% less than agreed in the preliminary agreement with the seller dated 1 September 2014. According to a 2014 recommendation by the Brokerage House of PKO Bank Polski, professional transaction advisor responsible for AWT's valuation, the price for the purchase of 80% shares of AWT price was EUR 111 million.
- PKP Cargo in 2014/15 was interested in acquiring 100% of shares in AWT B.V. At the time PKP Cargo signed the agreement with the owner of AWT B.V., a similar offer featuring the same price was received by the owner in respect of a 20% stake. The offer was rejected by him due to the offered price being too low in his opinion.
- The final price was the equivalent of approximately 6 times the EBITDA (roughly meaning the company's operating profits) of the target company, which, considering that the benchmark level of transactions in the logistics market segment in the period 2007-12 equals 6.44 * EBITDA, bears testament to the fact that the transaction had all the features of an arms' length transaction.
- The fair value of acquired assets (minus liabilities) of AWT B.V. was PLN 138 million higher than the price paid. As a result, the 2017 financial statements showed this amount as a profit as a result of the occasional purchase of AWT. In 2016 and 2018, the Management Board of PKP Cargo made – in the course of day-to-day operating activities – write-offs totaling PLN 52 million. This means that at present AWT B.V. assets are valued at PLN 86m more than the implied price paid for shares by PKP Cargo at the time of the transaction. This valuation was accepted every year in 2015-18 by successive Management Boards and statutory auditors of the company in annual reports.
- AWT's accumulated EBITDA in 2014-17 amounted to EUR 81.4 million. The price for 80% of AWT B.V. shares amounted to EUR 103.2 million. This means that – if only EBITDA for 2018 turns out to be no worse than the average annual EBITDA for the previous 4 years – the costs of purchase of 80% of AWT shares by PKP Cargo have already been recovered! In addition, the above result does not take into account the synergy effects of AWT with PKP Cargo.
- On 2 November 2017, the Management Board of PKP Cargo increased its shareholding in AWT B.V. to 100% by buying back the remaining 20% of shares in AWT B.V. from the minority shareholder for the price of EUR 27 million, which means the valuation of 100% shares tallied with the 2014 price.
- On 8 December 2018 AWT, already a 100% subsidiary of PKP Cargo, acquired 80% of shares in the Slovenian rail freight company Primol-Rail. The price or details of the transaction have not been disclosed, which amounts to a violation of the standards applicable on the public market in Poland and significantly deviates from the standards adopted when purchasing AWT B.V. in 2014/15.
OKD policy and bankruptcy
- In the Consolidated Annual Report of the PKP Cargo SA Capital Group published in the first half of 2016, its CEO at that time, Maciej Libiszewski wrote in a letter to shareholders: „The most important event in 2015 was the acquisition of 80 per cent of shares in Advanced World Transport (AWT), the second largest rail freight carrier in the Czech Republic and one of the largest private carriers in Europe. Thanks to this investment, PKP Cargo strengthened its strategic position in Central and Southern Europe. Thanks to the inclusion of AWT in the structures of PKP Cargo, we have increased the scale of our operations abroad and our capabilities in servicing European markets.” At the same time, in July 2016, the very same Maciej Libiszewski filed a crime report to public prosecution authorities on the previous management board of PKP Cargo in connection with the purchase of AWT!
- The purchase of AWT by PKP Cargo was touched upon in the speech delivered in the lower chamber of the Polish Parliament by Minister Andrzej Adamczyk on 11 May 2016 regarding what was known as the „audit of state treasury companies”.
- On 4 July 2016, PKP Cargo published a current report on the preparation of another AWT valuation, which indicated the overestimation of AWT's valuation in the 2014 transaction. The expert opinion is confidential. The procedure in which the expert report was commissioned and the experience people who prepared the expert report had with transactions of a similar scale are unknown.
- On 3 May 2016, AWT's contractor – the Czech OKD mining corporation, filed for bankruptcy. On 2 August 2016, PKP Cargo published information regarding the recognition by the Ostrava Court of all receivables from OKD in the course of the restructuring process. Notwithstanding the foregoing, on 26 September 2016, PKP Cargo decided to write off all receivables from OKD.
- In October 2018, the Czech Prime Minister Andrej Babis announced that the OKD mines would continue their coal mining business until at least 2030. This means that the optimistic scenario assumed by advisors in the AWT purchase process would come to fruition. This change was confirmed by the state-owned PRISKO company, OKD's sole shareholder.
- OKD's profit in 2017 amounted to approximately CZK 3.5 billion, or approximately PLN 500 million. According to publicly available information, after the first half of 2018, OKD had operating profits of 2.3 billion CZK, or approximately PLN 400 million, and had free cash at the level of approximately 2.4 billion CZK, i.e. over PLN 400 million.
A wider perspective
- From April 2012 to November 2015, I was President of the Management Board of PKP SA. During this period, I managed to create within the PKP Group a few hundred-person strong team of professional, completely apolitical managers with railway and non-railway specializations who authored unprecedented reforms. Each and every one of them was dismissed, with no single exception, from the PKP Group in 2016.
- One of the elements of these changes was the public WSE listing of PKP Cargo as the second largest freight carrier in the EU, and the development of a long-term development strategy, which had been promised by the Management Board and the strategic owner to investors. The prospectus approved by the Polish Financial Supervisory Authority on 4 October 2013 stated as follows: „The Group intends to develop through acquisitions and strategic alliances with other rail carriers abroad. In the long term, the Group intends to become a major player on the neighboring markets. Business development on foreign markets will enable the Group to continue to take advantage of the benefits resulting from economies of scale and to increase the level of rolling stock utilization.„
- The PKP Cargo Strategy for 2019-23 adopted in November 2018 by the Management Board of PKP Cargo headed by Czesław Warsewicz, confirms that „achieving the goals will be based, among others, on foreign expansion.„
- In total, 67% of shares in PKP Cargo were sold by their owner, PKP SA, in two tranches: 50% were sold during its stock exchange debut on 30 October 2013, and an additional tranche of 17% was sold on 18 June 2014. The average selling price was PLN 70. Today – after 5 years – PKP Cargo shares are worth PLN 42, which is exactly 40% less. The revenues of PKP SA on sales were PLN 2.1 billion. Tey helped to pay off the historical debt of PKP S.A. PKP S.A. remained the strategic owner, retaining control over the company. Within a month after the takeover of AWT – in January 2015 – the price of PKP Cargo shares increased by about 10%. The stock exchange valuation of PKP Cargo at that time was around PLN 3.7 billion. Today, this value amounts to approximately PLN 1.9 billion.
- The acquisition of AWT for approximately 20% of the amount obtained from the sale of 67% of shares in PKP Cargo was part of a long-term strategy for the international expansion of „national champions” such as PKP Cargo. This course of action was outlined by Prime Minister Mateusz Morawiecki in the „Responsible Development Strategy” in 2017. „For me large companies, very large also (…), which have a status so developed that they can expand abroad, are absolutely crucial for economic development, because by increasing the scale of their activities (…) scope, only thanks to this they can do this international expansion and pave the way for a smaller one” said Mateusz Morawiecki on 23 October 2017. The charges pressed against Management and Supervisory Boards of state-controlled „national champions” 4 years following the completion of the successful cross-border takeover do not seem to act as an effective motivation to foreign expansion for the managers of these enterprises nominated by the current political authorities.