bne -

A controversial agreement secretly drawn up between CEZ, J&T Finance Group and EnBW Energie Baden-Württemberg before the 2009 tender for the Czech assets of UK-based International Power forms the centrepiece of the European competition authorities' ongoing antitrust investigation into the giant Czech utility, which if found guilty could be forced to divest assets.

A copy of the agreement obtained by bne, entitled "Agreement on Co-operation in the Czech Energy Market" and signed on 24 June, 2009 by J&T's corporate investments partner Daniel Kretinsky, CEZ Director of Mergers & Acquisitions Vladimir Schmalz and EnBW head of M&A Dr Johannes Zugel, shows that a week prior to the announcement by International Power it had halted the tender for its Czech assets before the 1 July deadline and agreed to sell the assets directly to J&T, the energy firms agreed how they might - and subsequently did - conduct themselves during the tender and undertake share swaps to consolidate their respective positions on the Czech energy market.

International Power's controversial decision to halt the tender for its Czech assets before the deadline for bids and sell the assets directly to J&T for CZK22.5bn (€912m) prevented a bid from a competitor such as Czech Coal from being placed, thus enabling the secret agreement to be put into practice.

The document spells out that given EnBW's decision not to submit its prepared bid for the assets of International Power - which comprised the Opatovice power plant, as well as a 49% stake in Prazska teplarenska, a district heating business - it would offer to swap the 49% stake it holds in Prazska teplarenska holding for J&T's 41.1% stake in Prazska energetika, the main electricity supplier for Prague. Thus EnBW would end up with a majority holding of Prazska energetika and secure a stable power distribution business in the Czech capital. Following CEZ's announcement on 1 July, 2009 it had agreed to buy the 49% stake in Prazska teplarenska that J&T had acquired from International Power, the asset swap with EnBW would then give J&T and CEZ almost 100% of Prazska teplarenska.

The spark that lit the fuse

J&T argues there is nothing improper in the confidential agreement. "There are a lot of examples when top energy companies in Europe, which otherwise are in a tough market contest, cooperate in a very special and very limited part of the territory of their common interest - and this kind of cooperation is in perfect compliance with competition law," says Martin Manak, a spokesman for Energeticky Prumyslovy Holding (EPH) - a joint venture between J&T, PPF Group and J&T's corporate investments partner Daniel Kretinsky, into which J&T has folded its energy assets.

However, one Prague-based lawyer for an international law firm, who declined to be named, says the document is certainly controversial and needs further scrutiny. And a source with knowledge of the European Commission's decision to launch a series of dawn raids on 24 November 2009 on the offices of CEZ and J&T says the document was one of the main factors that led to the probe. "The Commission has reason to believe that action carried out by CEZ unilaterally or together with other players may have led to a substantial distortion of competition and resulted in the enhancement of CEZ's dominant position on the Czech wholesale electricity market," the Commission said at the time of the raids.

CEZ too has denied any wrongdoing, though this secret agreement flatly contradicts what CEZ M&A head Schmalz told the local press in April when he denied that CEZ, J&T and EnBW had prepared in advance their respective positions and stated that his firm was no more than a bystander observing the talks between the City of Prague, EnBW and J&T over the latter two's asset swap.

Analysts say the existence of this agreement could be key to the European Commission's investigation since it would allow the J&T acquisition of International Power's assets and the subsequent deals to be considered as one transaction. Even CEZ has admitted it couldn't be part of the tender for International Power's assets. "Given its position in the Czech power generation market, CEZ was effectively prevented from bidding directly for the package of International Power's assets, as they were only offered as a whole. CEZ therefore negotiated the purchase of the minority stake in Prazska teplarenska with the new owner of the assets, J&T Group," CEZ said in a statement in July of 2009.

Says Jan Ondrich of the Prague-based advisory firm Candole Partners, "The reason why the agreement may prove critical for the Commission's eventual decision is that continuing coordination between CEZ and J&T allows the Commission to consider the first transaction and those which followed as a single event that has made an already highly concentrated market much more so. This would mean that the Commission might oblige CEZ to divest some generation assets."

Home sweet home

Such an outcome would please CEZ's competitors, who have complained long and hard about CEZ's growing dominance on the Czech electricity market as the utility refocuses its attention on its home market after a mixed record of buying assets around the region. Given its dominance on the Czech market, critics say it uses J&T as "off-balance sheet special purpose vehicle" as a means to avoid competition scrutiny. "The publicly available evidence suggests that CEZ and J&T/EPH may be treated for competition purposes as one entity, giving them a 74% share in the Czech generation market," says Ondrich.

The Czech electricity market is one of the most expensive for consumers in the EU and, perhaps not coincidentally, one of the most concentrated, with four players controlling 80% of installed capacity. CEZ is the largest of these with 68% of the generation market, two-thirds of which comes from coal-fired power plants.

Petr Pudil, chairman of Czech Coal, has made no secret of his desire to see CEZ and J&T investigated for anti-competitive practices. "We believe that CEZ and J&T groups' concerted steps should be investigated over whether they are capable of deepening the imbalance on the market of electrical energy generation and on the brown coal market. In such a case, these steps might be unfavourable for the Czech and European markets and customers," Pudil has told bne.

Commission officials declined to comment on the ongoing investigation, which is still thought to be at a relatively early stage, and no "statement of objections," or formal charges, has been sent to any of the companies involved. However, there are already signs of friction in the case. Last May, the commission opened separate proceedings against J&T Finance Group, J&T Investment Advisors and EPH to see whether these companies had tried to obstruct the commission's November raids. Brussels said there had been "a number of incidents", centred around email accounts and access to electronic records, with officials concerned they might be getting incomplete information. EPH and J&T deny doing anything improper in this.