Cepro teams up with EPH for Unipetrol bid

By bne IntelliNews September 4, 2015

bne IntelliNews -


Czech state-owned fuel company Cepro has joined the push by energy holding EPH to buy Unipetrol, the country's leading oil refiner and petrochemical company, from Polish oil concern PKN Orlen, local media claimed on September 4.

The introduction of Cepro to the equation would be intriguing, reintroducing powerful billionaire Finance Minister Andrej Babis as a central figure, after he took a firm grip of the fuel company last year. A deal could also bring the country's refining capacity back into state hands, but suspiscion persists that it may also be driven by Babis' business interests, or his personal emnity towards the Polish owner.

EPH, controlled by closely-held Slovak financial group J&T - which has built up a sizable minority stake in Unipetrol in recent years - and oil products and fuel company Cepro have agreed to coordinate efforts to take over Unipetrol, Hospodarske Noviny reports, citing unnamed sources. In July, the same paper suggested EPH was teaming up with financial group PPF - owned by Peter Kellner, Central Europe's richest man – to submit a bid of around CZK30bn (€1.1bn) for Unipetrol.

This time sources claim that if EPH succeeds in its bid it could sell Unipetrol’s Kralupy refinery to Cepro, which has long sought Unipetrol assets.

Both EPH and Cepro declined to comment on the report.

Unipetrol operates the country's largest network of petrol stations under the Benzina brand, as well as refineries in Litvinov and Kralupy. The latest reports revive a bevy of questions regarding the economic and political role of the Czech Republic's only major refiner.

Controlled by the Polish treasury, PKN Orlen is unlikely to be in a great rush to sell because the fortunes of the mid-stream assets are just turning up after years of struggle, and the time is not right politically, just before this October's Polish election.

European refineries have been the weak link in the energy chain in recent years, as high oil prices and overcapacity have colluded to turn them into a financial drain on owners. PKN has been struggling for some years against the Czech government's demands to invest in upgrading Litvinov and Kralupy, with the company complaining that margins at the facilities make putting in capital unfeasible.

However, with the collapse of crude prices last year, the mid-stream segment has suddenly become a strong earner. PKN has recorded its strongest refining margins in years in recent quarters at group level.

Unipetrol has been doing its bit. In the second quarter of 2015 it earned a record net profit of CZK3.3bn. While that level of performance is not expected to last forever, it has led the share prices of both parent and subsidiary to boom.

Meanwhile, politics also plays a role in Poland. With the country's giant state companies a powerful lobby and seen as a sign of national strength, the government - already under huge pressure to catch the populist opposition in the polls - is unlikely to sell, at least ahead of elections in October.

As for the Czech government, it has long sought to buy back the refineries. Earlier this year, the government rejected a proposal by PKN that wanted to merge Ceska Rafinerska – the operator of the two refineries – with Cepro and state-owned oil pipeline operator Mero into one company, to be controlled by the Polish group. PKN has long complained that high prices charged by the two Czech have only worsened the pressure on the refinieries' financial performance.

Litvinov and Kralupy are seen as strategic assets by Prague because of the role they play in the country's bid to maintain alternative crude oil supplies to those arriving from Russia. With Russian oil majors said to be using the country as a test case for raising prices, a severe cut in deliveries via the mainline Druzba pipeline in 2012 highlighted its vulnerability.

That cut led Ceska Rafinerska to shut Kralupy for some weeks. It also forced Prague into action, with the state buying a stake in the TAL pipeline that runs oil from Azerbaijan, Kazakhstan and Iran via Italy's port of Trieste. Demand from the two refineries is vital to keep the Czech capacity orders through the route.

Prague appeared, at first, to be mulling PKN's offer to merge the companies. However, Babis stomped on the plan. At the same time, the finance minister tightened his grip on Cepro and Mero.

The finance minister has long had his eye on Unipetrol and has little love for the Polish owner. The billionaire - tipped as a future prime minister -  is still reported to be smarting from having lost several legal cases he brought against PKN over its refusal over a decade ago to sell Unipetrol's petrochemical assets to his conglomerate Agrofert. Babis claims he had a prior agreement with PKN to buy the assets after the privatisation of Unipetrol.

At the same time, as James de Candole - a trenchant Babis critic - noted last year, Agrofert supplies Cepro with biofuels. In 2013, the Cepro business was worth €35m to Agrofert. Earlier this year, citing Babis' conflict of interest, the opposition called a confidence vote in the government after parliament rejected a proposal to end tax advantages for biofuel producers. The move would have brought the Czech Republic into line with EU regulations. 

"It's clear how Agrofert's interests might be threatened by PKN and Cepro moving closer together," de Candole asserted. "But it is far from clear how this would harm the interests of the Czech Republic."

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