How the dream of a lottery selloff came to nothing

Banks blamed for undervaluing book value of state-owned company

Under pressure from the opposition and undermined by a banking sector that suddenly got cold feet, the government moved last week to cancel its much-vaunted sale of part of the state lottery, the prize asset among Spain's few remaining state-owned enterprises.

The sale of a 30-percent tranche in LAE would have been Spain's biggest public offering ever, and one of the largest in Europe. The decision for a partial selloff was taken by the government as part of a raft of measures to avoid Spain being further damaged by the euro-zone financial crisis.

LAE president Aurelio Martínez blamed the markets for the decision to pull the sale. "I haven't failed, the markets have failed," he told reporters on Friday. Spanish Economy Minister Elena Salgado said on Wednesday she had pulled the sale of 30 percent of LAE to avoid selling it at a discount to the company's 20.8-billion-euro book value. The government had calculated it would generate at least nine billion euros for the one-third selloff.

Salgado said there was "extraordinary" interest from retail investors, while institutional investors were interested "at a price we didn't want to accept." The decision to cancel the LAE deal does not affect a separate tender to sell management contracts for Madrid and Barcelona airports, she said.

Martínez avoided directly blaming the banks, but analysts say that they need capital to shore up their balance sheets and that Loterías was direct competition. It would have attracted investors who would otherwise have opened deposits that the banks badly need.

The timing of the government's planned asset divestments has been complicated not only by the recent market turmoil but also by the fact that Spain will hold general election on 20 November. Opinion polls indicate that the center-right Popular Party (PP) will return to power, after seven-and-a-half years of Socialist government under Prime Minister José Luis Rodríguez Zapatero. Senior PP officials have spoken out against selling state assets so close to a possible change of government.

The PP's economy secretary, Cristóbal Montoro, said last week that the LAE sale must be stopped.

While revenue from privatization sales cannot be used to reduce annual public deficits under European Union rules, the proceeds from the National Lottery share sale would have allowed Spain to trim its plans for some 190 billion euros of debt issuance this year. Salgado, however, argued that the cancelation of the selloff would not have a "significant" impact on the debt calendar.

Spain's borrowing costs have soared since its deficit far exceeded European Union limits in 2009 and the euro-zone debt crisis stoked fears the government may not be able to bring its budget back to sustainable levels. The collapse of the LAE sale is likely to raise concern among investors that the government will also struggle to attract acceptable prices for other assets earmarked for privatization.

Spain held its first national lottery in 1812, to raise money for the war against the occupying French troops of Napoleon. With anticipated revenue of 13 billion euros this year, the Spanish lottery is the world's largest. At Christmas, it runs the world's largest single prize drawing, dubbed El Gordo, or "The Fat One," which has become part of the traditional end-of-year festivities. About 70 percent of Spaniards chase total prizes that are expected to reach 2.5 billion euros this year.

Franchise owners wary of LAE "trap"

The owners of the retail franchises that sell lottery tickets have opposed the sale of part of the LAE state lottery firm, although it would have meant they paid less tax. Under the proposed conditions of the sale, their shops would have become limited companies. Currently, aside from taking a percentage of ticket sales, the owners of lottery shops take part of the winnings of lucky tickets, but pay tax on it as individuals.

Pedro Lamata, a member of the board of ANAPAL, the organization that represents the owners of LAE franchises, said that the conditions the company was trying to impose on its members in the event of a selloff were "a trap." He accused LAE of aiming to increase the number of shops selling tickets. "The new rules would mean four times as many lottery outlets, and we would also be forced to sell other products, which would affect our productivity," he said, adding: "We won't be forced into accepting the LAE's conditions."

Aurelio Martínez, LAE president, says that some 60 percent of lottery outlet owners have already signed a deal with the state-owned company. But Lamata points out that the figure includes outlets that sell other products, and that only a quarter of the 4,000 shops selling only lottery tickets have agreed to the company's conditions. The lottery outlet owners also want to be able to pass their business on to their children, a practice that Martínez admits has been the norm, but that under privatization would be impossible.

Recomendaciones EL PAÍS
Recomendaciones EL PAÍS