All change at Czech/Slovak energy group EPH

All change at Czech/Slovak energy group EPH
EPH has used debt to bankroll a ravenous acquisitions drive for fossil fuel assets in Central and Western Europe.
By Tim Gosling in Prague October 17, 2016

Closely-held Czech/Slovak energy group Energeticky a prumyslovy holding (EPH) announced a surprise change in its shareholder structure on October 17, as Patrick Tkac, one of the main shareholders of the company, agreed to sell up to partner Daniel Kretinsky.

The news was accompanied by two other anticipated deals. J&T Private Equity Group (JTPG) has agreed to sell its 25.67% stake – held via Biques Limited - in EPH.

It has also been confirmed that a consortium of global institutional investors led by Macquarie Infrastructure and Real Assets (MIRA) will buy a 30% stake in EP Infrastructure (EPIF), a holding containing assets that include a 49% stake and management control of Slovakia’s main gas pipeline carrying Russian gas into the EU.

Via the JTPG deal and contributions of 2.17% from Tkac and Kertinsky, EPH will buy a 30% stake in its own shares for €1.5bn, and afterwards will cancel those shares. That price values the group at €5bn, EPH says in a statement.

Tkac will then sell his remaining 35%, held via Milees Limited, to companies controlled by Kretinsky for €1.75bn-2.75bn over time. The final amount payable to Milees “will reflect growth in the underlying value of EPH over the coming years", the company adds.

All deals are expected to be closed by early next year.

Tkac does not discuss his reasons for exiting the group, which has followed a strategy of using high debts to bankroll a ravenous acquisitions drive of fossil fuel assets in Central and Western Europe in recent years. He says only that the deal “represents a partial monetization of gains from an extremely successful project”.

The staggered exit “will allow us to participate on future results of EPH and thus future growth of EPH will remain our common interest", he adds. Those results appear to depend crucially upon the development of a capacity market across the EU, whereby the bloc will pay owners of fossil fuel plants to mothball capacity in order to keep it as a back-up to more erratic renewable energy production.

Geopolitics also represent a risk. Russia is pushing to bypass Ukraine’s gas network. Should Moscow succeed, the longer term revenue at Eustream – operator of the Slovak mainline that carries a large percentage of Russian gas from the eastern border to Austria – could be hit hard, although the company says it has guarantees in place for the next decade or more.

Macquarie appears untroubled. Eustream is the main asset in EPIF, in which the corporation’s Fund 5 is buying a 30% stake, a separate statement from EPH confirmed. The Czech/Slovak holding launched an IPO of the spun off EPIF in April, only to scrap the plan within a couple of weeks.

No pricing details of the Macquarie deal have been released. Investment banks preparing the float in April were reported to be valuing EPIF at CZK135-210bn (€5bn-7.6bn).

The proceeds from the deal will be used by EPH to power its purchase of the stake from JTPG. The private equity group, whose shareholders are hidden, has long been expected to exit the holding.

Kretinsky will eventually be left with a 94% stake in EPH. “Selected members of the existing management of EPH” will hold the remaining 6%, the statement reads.

Both Tkac – a partner in J&T Financial Group (JTFG), which has agreed to be taken over by mysterious Chinese investor CEFC – and Kretinsky stress that the exit of the former was unexpected but friendly. The statement also illustrates the deep connections between JTFG, EPH and the unknown owners of JTPG.

“The sale of the shareholding by Milees Limited and Biques Limited allows the founders of J&T to accumulate funds amounting to over €3bn, which we aim to use, together with other funds that we manage on behalf of our clients, to set-up a new and powerful investment fund,” Tkac adds in his comments. “We expect to invest our funds primarily into selected projects of ex-partners of J&T, including those of Daniel Kretinsky.”

In particular, it is stressed that the pair plan to continue to cooperate in their ventures in other areas, media and e-commerce in particular.

Through Czech Media Investment (CMI), Kretinsky and Tkac have snapped up titles that account for more than one-third of Czech newspaper readership in recent years, part of a wider move by powerful local business groups to control the media in Central Europe. They bought business daily E15 and a dozen weeklies from publishing house Mlada Fronta in the summer.