China's CEFC raising the stakes in Central Europe

China's CEFC raising the stakes in Central Europe
Czech refineries look a far better fit for CEFC than beer and football
By Brian Kenety in Prague March 21, 2016

Chinese financial and energy conglomerate China Energy Company Limited (CEFC) is looking to expand its acquisition spree in the Czech Republic and is eyeing major banking and energy assets, local press reported on March 21.

Among deals expected to be announced during Chinese president Xi Jinping’s upcoming visit to the Czech Republic is CEFC's takeover of a 23.7% stake in Prague-listed Unipetrol, via a joint venture, Hodspardske noviny writes, citing unnamed sources. The mysterious investor, said to be connected to the Chinese security services or military, is also eyeing GE Money Bank as it bids to build a Czech/Slovak bank holding, it is claimed.

If accurate, the reports suggest a serious step up in ambition for the Chinese company. CEFC entered the Czech market last year with a spate of relatively small investment deals, buying a building in downtown Prague, a football club, travel company and a brewery, all of which appeared incongruous with its apparent size and usual activities in energy and banking.

Xi Jinping’s official visit – the first ever to the Czech Republic by a Chinese head of state – is expected to conclude with the signing of a joint statement establishing a “strategic partnership” between the two countries, in the works since 2014, along with memorandums of cooperation in investment, finance, aviation and health care sectors. The cooperation would be at bilateral level, as well as within the 16+1 platform involving Chinese interaction with 16 countries of Central, Eastern and South Eastern Europe, and the EU-China Strategic Partnership also.

“The Czech side is interested in strengthening of bilateral cooperation in the aviation industry, financial services and logistics, also with reference to the Belt and Road initiative,” said Deputy Minister of Foreign Affairs, Martin Tlapa, following a preparatory meeting on March 11 with Chinese counterpart Liu Haixing.

Big bank, big oil

The shares in Unipetrol, the country's only refiner, would come under CEFC's control alongside the Chinese company's bid to raise its stake in Czech/Slovak J&T Financial Group (JTFG), which currently holds the shares, to 50%. That deal entails forming an energy JV, which would control the Unipetrol stake, with CEFC to hold a 51% stake. The new entity is to be called CEFC Energy.

As bne IntelliNews reported earlier this month, CEFC is looking to increase its stake in the closely-held JTFG after buying a 9.9% stake last year. The Chinese group’s overall investment in J&T would apparently rise to €980mn by boosting its stake to 50%.

J&T is also reported to be looking to sell its minority stake in EPH, the energy holding that has collected a wide array of assets in Central Europe and beyond over the past few years. J&T alumni maintain control of EPH, while speculation over the source of EPH's huge acquisition funds is rife.

CEFC is also reportedly eyeing a stake in GE Money Bank, with a plan to create a bank holding company in the Czech Republic and Slovakia. Combining the US-owned unit – which has been up for sale for some months – with J&T Bank would hand the group over 2mn retail clients with deposits of over CZK300 bn (€11.1 bn). CEFC VP Marcela Hrda told HN the strategic goal is to build a multinational investment banking and retail banking institution with JTFG.

The deal on Unipetrol would make CEFC the second-largest shareholder in the Czech company, after 63% majority owner, Poland’s PKN Orlen. Such ambition looks to be far more in line with the Chinese company’s profile than the acquisitions made last year. "Refining assets would fit in its core business," Erste Group Bank wrote in a note to clients.

The Chinese company, which has rapidly emerged from obscurity to become one of China's leading corporations in recent years, already has a controlling stake in Hungary’s BorsodChem via Wanhua Industrial Group. Linking Unipetrol's business to BorsodChem units, such as PVC, could be attractive for CEFC.

Cars and beer

In other deals involving CEFC speculated to be set for signing during Xi's visit, the company is set to start offloading some of the assets it bought on entry to the Czech Republic last year. China Eastern Airlines will take an unspecified stake in budget airline Travel Service, which is currently owned 50% by CEFC, while Ershang Group of Beijing will take a 20% stake in brewer Pivovary Lobkowicz, with CEFC retaining 70% and CEO Zdenek Radil 10%. A CZK30 bn fund, founded jointly by CEFC and Hengfeng Bank, is also on track to take over Czech engineering company ZDAS from its Slovak owner, Zeleziarne Podbrezova, having reportedly offered the highest bid, of $100m.

However, CEFC is not the only Chinese company looking at the EU member state. Czech carmaker Skoda is set to take a stake in a joint-venture between German parent Volkswagen Group and China’s largest carmaker, SAIC Motor Corp., the weekly Euro reported on March 21. Skoda is expected to sign an MoU during the Chinese president’s visit that would see "hundreds of millions of euros" invested into developing electric cars and other technologies, Euro reports, citing unnamed sources.

A SAIC Motor-Volkswagen JV has been in place since the mid-1980s. The Chinese carmaker has a 50% stake, Volkswagen 40%, and Volkswagen (China) Invest the remaining 10%.

SAIC board chairman, Ye Jianming, led a delegation to Prague in January, meeting with President Milos Zeman and Prime Minister Bohuslav Sobotka. Patrik Tkac of JTFG and EPH, as well Marek Dospiva from Penta Group - another large Slovak financial group that has spread across the region.

Penta spokesman Ivo Mravinac, asked to confirm reports that CEFC had also approached his group, told HN: "At this moment we can only confirm that we have made initial contact with the Chinese investors. We are discussing the potential acquisition of shares in our portfolio that are not considered strategic and fully in line with our investment strategy."