Czech companies vie in contest for stake in Slovak power giant

One of the biggest maneuvers of the year, the exit of Italian power company ENEL from Slovakia’s biggest electricity producer is being played out with two very contrasting Czech companies, ČEZ and the EPH group, closely following developments for what could be a decisive change in the Central European electricity market.

Photo: Miloš Turek

Two giant Czech companies, one substantial Slovak acquisition target. But state controlled electricity producer ČEZ and Energetický a Průmyslový Holding (EPH) last week decided to take different routes over one of the biggest potential acquisition deals in Central Europe ; the purchase of a majority stake in Slovakia’s dominant electricity producer Slovenské Elektrárne from Italian power giant ENEL.

Whereas ČEZ decided not to push ahead and make a binding bid for the 66% shareholding, EPH said it will table a firm offer. And that step has raised quite a few eyebrows given the frenetic past acquisitions history of the privately held group.

EPH is majority owned by businessmen Daniel Křetínský and Patrik Tkáč with the J&T investment group also having a third of the shares. In recent weeks, EPH has snapped up old coal power plant assets in England and Italy. It already owns a minority stake in Slovakia’s main gas company SPP and one of the country’s three biggest regional electricity distributors.

The close, and relatively friction free, relationship with the Slovak government over SPP is widely interpreted as one reason why EPH’s possible bid for Slovenské Elektrárne is not dismissed out of hand. With interest rates near record lows, the cost of loans for a possible bid would not be that expensive but many industry analysts already wonder whether EPH has not already taken on too much debt and question whether Slovenské Elektrárne might not be a deal too far.

Petr Hlinomaz is an analyst with the Prague based brokerage BH Securities. I asked him whether he believed EPH has a real chance of pulling off what would amount to a spectacular acquisition which would put it into the same league as some of Europe’s biggest power companies. “In fact, not so much. I think that the reasons [for the bid] might be only speculative, like deals with other parties or to know or obtain more information about the Slovak energy sector from ENEL. So I don’t think it is like it is claimed to be right now.”

Debt burden

Petr Hlinomaz, photo: Czech Television

Hlinomaz believes that EPH’s recent acquisition strategy has already burdened it with a lot of debt and in the latest foray it might be party acting for a third party bidder or has designs to hold on to only some of the power company assets and sell the rest off. “It seems that it is a little bit of a risky strategy but maybe they are trying to create a certain portfolio, maybe with some loss-making investments, but as a whole aiming to obtain a profit maybe with parties which are not so visible at this moment, maybe far from the Czech Republic like in Asia excetera.”

Double guessing the intentions of the Czech Republic’s second biggest electricity producer is a tricky game given that EPH is not a quoted company forced to disclose information and is not always very forthcoming about its strategy.

But while ČEZ has withdrawn itself for now from the Slovenské Elektrárne contest, largely because the Slovak government would clearly like to swop its current position as a minority shareholder with 34 percent of SE shares to a majority owner dictating the company’s direction, it does not believe it is out of the game. It clearly hopes that a new set of circumstances could unfold if the Slovak government regains control of Slovenské Elektrárne and then seeks a partner to replace the outgoing ENEL.

Second bite?

Daniel Beneš, photo: Filip Jandourek

This is what ČEZ chief executive and board chairman Daniel Beneš had to say Tuesday following the company’s first quarter results presentation. “I think that the most probable case is that the Slovak government should buy 17 percent [to give it a 51 percent majority in the company] and we should wait for that and after that we should continue the discussions.”

Daniel Beneš’ belief that ČEZ could in some way make a Slovak comeback is shared by one expert on the Czech energy market, J&T analyst Michael Snobr: “I think that ČEZ will wait for another situation to develop Slovenské Elektrárne. I think the next step will be for the Slovak government to buy the ENEL stake in SE and after that the situation will again be open and after that ČEZ will again negotiate with the Slovak government about their potential in Slovenské Elektrárne. I think that is logical.”

Snobr’s scenario sees the left of centre government of Robert Fico buying all of ENEL’s stake and taking full ownership but then being willing to allow in a minority shareholder. This is how he summed up Fico’s likely bottom line. “They will try to sell a minority stake to a strategic investor and they will want to remain a majority shareholder in Slovenské Elektrárne. And that’s a good position for ČEZ because the connection between the Czech and Slovak market is logical. And the advantage for ČEZ as well as Slovenské Elektrárne is that it is better than other investors like EPH or the Hungarian MVM. So I think they still have a chance to stay in this business.“

Hungarian electricity company MVM has teamed up with the Slovak oil refinery unit of Hungary’s MOL, Slovnaft, to also make a bid for Slovenské Elektrárne. And the Finnish electricity producer Fortum, which keeps close tracks on Czech and Slovak developments, is also reported to be a likely bidder.

Mochovce nightmare

Mochovce, photo: Peko, CC 3.0

For ČEZ and EPH the pluses of Slovak expansion are that the Czech and Slovak electricity networks are well integrated as a result of the time when the two countries were part of the united Czechoslovakia. Slovakia’s dominant electricity producer which is responsible for around 80 percent of the country’s electricity production has a mixed portfolio of power generation assets. These range from the highly attractive hydro plants to the two ageing and subsidized coal fired power plants and nuclear reactors producing more than half the country’s electricity needs. The big question though hovers over the completion of the two nuclear reactors Mochovce 3 and 4.

ENEL has had a nightmare with its undertaking to complete the mothballed reactors when it bought into the Slovak power company almost a decade ago. Completion delays and costs have mounted for a company with limited recent nuclear know-how and experience. J&T’s Snobr warns that the last estimate for completing the two reactors in 2016 and 2017, around 4.8 billion euros will very likely not be the last word. He says the final bill for Mochovce 3 and 4 could turn out to be between 5.0 billion and 5.5 billion euros. It would need electricity prices around three times as they are now, at the levels of around 90-100 euros/MWh to cover those sort of construction costs, Snobr adds.

So, ENEL’s exit, perhaps a two-step maneuver rather than a single jump, should start to draw a line under its unhappy Slovak adventure. Who takes its place in a reformulated relationship with the Slovak government is still unclear but Czech companies are still in with a chance.