(FORTUNE Magazine) – Take a government-owned company. Sell shares of stock in the business to the public. Watch management scramble to improve productivity under the scrutiny of investors. For governments around the world that want to get out of the business of running companies and concentrate instead on running countries, this formula for privatizing businesses is immensely popular and profitable. But the money doesn't stop there. For investors, buying the shares of former state-owned assets -- from steelmakers to telephone utilities -- can lead to gains as well. Privatized stocks are frequently good deals. From 1988 to 1993, privatized companies, as identified by the London newsletter Privatisation International, appreciated an average of 14% a year. That was far more than the paltry 0.4% per annum price rise from Morgan Stanley's EAFE index of international stocks for the past five years and exceeded the 11% average annual gain for the S&P 500. Right now there are plenty of deals to choose from. Last year the industrialized world sold off $48 billion worth of goods. David Roche, global strategist at Independent Strategy in London, estimates that at least another $500 billion worth of privatization deals are slated for sale over the next five years. % Both the state and company management have plenty of incentive to make these offerings work. The state feels the political impetus to make the sales proceed smoothly, so deals are priced to sell, often at bargain rates. And management? Says Jean van de Walle, director of Latin American equities at Alliance Capital Management in New York City: "These are good companies that have been tremendously undermanaged under government control. When the private owners take over, they have a new life." To see the difference private ownership can make, consider Companhia Siderurgica Nacional, or CSN, Brazil's largest steel producer. The company was privatized in April 1993 and that year recorded a $71 million operating profit. Alliance's van de Walle expects earnings from operations to shoot to $108 million this year. Selling 12% of the privatized shares to the workers helped end years of labor strife and boosted productivity. CSN's ADRs trade over the counter for $26, or four times cash flow, vs. ten to 12 times cash flow for U.S. steelmakers. Right now Brazil's markets are nervously awaiting the outcome of the presidential election in October. Van de Walle thinks the stock could sell for $60 if Fernando Henrique Cardoso, the market's favorite candidate, wins. In Argentina, the oil company YPF, privatized in June 1993, is in the midst of an even more radical restructuring. The company has sold $2 billion in assets and shed 87% of its work force since 1990. Says Veronica Berger Collins, manager of the Argentina Investment Co. in London: "The company is becoming more productive every minute." She forecasts operating earnings will rise 25% over the next 12 to 18 months. At $24, YPF's ADRs trade for 12 times Berger Collins' estimate for 1994 earnings, giving the stock one of the lowest multiples on the Argentine market. YPF could give some cues to fellow oil behemoth Elf Aquitaine. The French government reduced its stake in Elf from 51% to 13% in a $6 billion international offering in February. Under the guidance of Philippe Jaffr, CEO since last August, Elf is trimming costs and selling assets. Best of all, the ADRs, recently $34, are cheap. According to Roche of Independent Strategy, shares sell for 4.4 times 1994 cash flow and 1.2 times book value, vs. ratios of six times cash flow and two times book for comparable companies like Shell and Total. Industrial giants aren't the only companies for sale. Many privatized listings are in telecommunications. Oscar Castro, manager of the Montgomery Global Communications fund, owns a smattering in his portfolio, including Telefonica de Argentina and Tele Danmark. Castro estimates that through a combination of volume growth and cost cutting both companies will boost earnings by at least 20% annually for the next two to three years. The ADRs should return more than 25% per year, he says. Apart from buying shares directly, investors intent on diversification can purchase the Alliance Worldwide Privatization fund, launched in April, or its closed-end version, the Global Privatization fund, which sells on the NYSE for a discount of 13% to its net asset value.

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