The path to privatisation is not an easy one for Malev in the midst of a struggle between the banks and the government

Published: 5/26/1999

According to board members of Malev Hungarian Airlines, it is likely that OTP Bank and the Hungarian Foreign Trade Bank (MKB) will sell their stake back to the state later in May 1999. Disagreements between the banks and the state, which is the majority owner, have been growing ever since a government-driven management change in October 1998 plunged talks of an alliance with other airlines and other strategic plans into chaos. Mr Bela Szabo, a former board member of Malev, said that OTP and MKB have the right to sell their 35% stake back to the state, if they can no longer agree with the bank on strategic decisions. Mr Szabo represented the State Privatization and Holding Co. (APV), when the banks bought their share of the airline. While the government still holds 65% of the voting rights, the agreement also gives the banks a preferential “golden share", so allowing them to veto a major decision. He added that: “The two parties are arguing about strategic plans, but on a general level." According to Mr Balazs Enyedi, who represents the Prime Minister"s Office on Malev"s board, the company"s losses in 1998 of Ft 1 billion ($4.6 million), is worse than expected. He said that the banks - via their joint venture Air Invest - are bargaining with the government outside the airline"s regular board meetings, and that a final settlement is likely to be announced soon. No official decision has been made, but Mr Miklos Nemeth, one of two OTP representatives on Malev"s board, confirmed that the banks are trying to reach sale terms. Declining to say why they decided to divest, Mr Nemeth said that: “This is not an appropriate time for the bank to make an announcement. This is an internal decision and an internal process inside the banks and inside Air Invest. It depends on a lot of things." According to Mr Szabo, in 1997, when Italian airline, Alitalia, decided to sell its stake in Malev, the government approached the two banks and offered them a deal designed to minimise the banks" risk. Signed in December 1997, it gave the banks the veto right, the sale option and a guaranteed price that was at least equal to the price they paid, a price which was not revealed. Initially, the banks took a strong management role in Malev and supported the airline"s efforts to find a foreign partner and possible investor. But the relationship between the banks and the government has deteriorated significantly since the current Fidesz-Hungarian Civic Party-led government came to power in May 1998. First, according to Mr Miklos Bencze, Legal and Administrative Director of Malev and Mr Ian Lovelock, Regional Driector of British Airways (BA), alliance talks between Malev and British Airways, which had been ongoing since March 1998, were nearly brought to a halt, largely for political reasons. While the previous government had asked BA to buy a stake in Malev - possibly all or part of the banks" stake - Fidesz and its coalition partner, the Independent Smallholders Party (FKgP), vetoed the idea and even suggested shifting talks to Lufthansa. In October 1998, citing a need to reverse losses totalling Ft 2.6 billion in 1997, the government fired the General Manager, Mr Sandor Szathmary. In the ensuing negotiations, the banks, wielding their veto power, insisted on hiring Mr Pongracz as General Manager. Mr Pongracz who had engineered a turnaround at state-owned gambling company, Szerencsejatek, and is a longstanding friend of Mr Sandor Csanyi, Chief Executive Officer of OTP was the bank"s favoured choice. The government however, had their own candidate for the top job ,Mr Ferenc Kovacs and had to settle for his appointment to Deputy General Manager. In order to appease the government and hopefully get a better price, the banks may give in to government demands to replace Mr Pongracz with Mr Kovacs. If the government does not co-operate however, the banks may well use their veto to gain further leverage in the on going discussions.

Article ID: 543