CEZ pulls out of race for Vattenfall's German coal assets

CEZ pulls out of race for Vattenfall's German coal assets
CEZ will not submit a binding offer for Vattenfall's German coal-based assets.
By bne IntelliNews March 16, 2016

CEZ will not submit a binding offer for Vattenfall's German coal-based assets, the Czech energy group announced on March 16. However, two Czech rivals have lodged bids with the Swedish seller.

State-controlled CEZ was one of three Czech suitors, alongside German power group Steag, to have made non-binding bids late last year for the 8,100-megawatt (MW) capacity at four lignite power plants and five mines put up for sale by the Swedish company in late 2014. However, on the day of the deadline for binding bids, CEZ said it has pulled out of the race due to weak European power prices. 

"The main reason for not submitting the binding offer is the unfavourable development in wholesale electricity prices that impact the financial performance indicators and the duration of operation of ordinary power stations, as well as the ongoing uncertainty regarding early shutdowns of coal power plants in Germany," CEZ said in a statement.

Although the assets are profitable, Vattenfall has been pushed by the Swedish government, its main shareholder, to offload the highly polluting assets. However, while interest was high last year, it has dwindled somewhat as power markets remain weak, and regulatory risk rises.

The deal was originally thought worth up to €3.5bn including an extra package of 10 hydropower plants. The lignite assets were estimated to be worth around €2bn last year.

Steag has proposed setting up a foundation to manage the lignite assets, according to Reuters. The Wall Street Journal reported that the Swedish company would be asked to inject around €2bn into the assets under that scheme.

A binding bid was received by Vattenfall from Czech Coal, according to news wires. The company, controlled by billionaire Pavel Tykac, has been desperate to get its hands on generation capacity due to its tussle on the Czech market with the other two Vattenfall suitors from the country. CEZ and EPH have previously been accused of teaming up to prevent Czech Coal from gaining power assets, in a bid to suppress the price of lignite on the Czech market.

EPH on March 16 also confirmed it has submitted a binding bid, clubbing together with financial group PPF to maximise its offer. Buying Vattenfall’s assets would expand EPH’s presence in Germany, where it already owns brown-coal mining company Mibrag.

However, the offer seems more driven by the energy holding's recent strategy to buy ageing fossil fuel assets. After a rash of large deals in Central Europe, last year EPH began snapping up assets in more mature Western European markets including the UK and Italy.

The Czech-based energy holding, controlled by oligarchs from Slovak financial group J&T, says the strategy is driven by hopes for "capacity market" regulation. That would see the EU pay subsidies to operators of shuttered generation assets to keep them as back-up to new, cleaner capacity. Germany decided last year to put some of the country's lignite power plants in reserve starting in 2018. That includes 1,000 MW of Vattenfall's capacity.

EPH clearly suggests it hopes to buy the assets at cut price, as part of that strategy. "We... emphasize that we are fully mindful of [the] current economic condition of Vattenfall's lignite operations, including the fact that in the forthcoming years, unless... power prices will materially recover, the company will not be in a position to distribute any dividends and rather will generate a negative cash flow,” EPH chairman Daniel Kretinsky said in a statement.

Mindful, perhaps, of the chance of driving a bargain, CEZ, which has found itself beaten to the punch by EPH on several major acquisitions in recent years, appears to hope that it could still work out a deal with Vattenfall.

"The company is however prepared to further discuss other possible options and terms of the acquisition," the state-controlled company's statement reads. "Coal is still a crucial source for the overall energy supply in Europe and will in the next decades serve as a bridging technology towards… renewable energy."