Czech utility CEZ dreams again of building regional giant

By bne IntelliNews April 30, 2014

Tim Gosling in Prague -


Czech state-controlled utility CEZ is looking at a new acquisitions drive now that plans to expand the country's nuclear power plant have been dropped. The claim from the power company's CEO is unlikely to cheer shareholders of most shapes and sizes however. 

After years of struggle to convince itself, the government, shareholders, potential partners and the market that it could afford the €10bn or so it would cost to build two new units at the Temelin nuclear plant, CEZ scrapped the tender on April 10 after the new Czech government stated clearly it would not offer the project guaranteed pricing for its output. The move was popular with the market, which almost universally agreed that it was economic folly while European power markets were so moribund.

However, suspicion is also likely to be the reaction to the claim from CEO Daniel Benes that CEZ is now free to launch a new round of regional acquisitions. The Czech power giant may be interested in buying some German assets from Vattenfall, he told Bloomberg in an interview. There are also attractive opportunities in Poland, he added.  

New adventures in nuclear?

Slovak national utility Slovenske Elektrarne is likely the top target, he suggested. "The biggest failure in CEZ's history was that we didn't buy Slovenske Elektrarne," Benes said. "CEZ would be in a completely different position today had it succeeded back then," he added, evidently referring to the privatization of the company by Bratislava in 2003-04. "So if that asset is up for sale, we will gladly enter into negotiations about it."

The winner of the tender a decade ago was Enel. In contrast to CEZ's recent nuclear non-adventure, the Italian energy company has received over €500m in support from the Slovak government for the €3.8bn expansion of the Mochovce nuclear power plant. The contract is being run by Russia's AtomStroyExport, which was favourite to win the Temelin tender before it was scrapped.

However, a spokesperson for Enel told Bloomberg that its assets in Slovakia are not up for sale.

Benes added that CEZ has no plans to buy at home, suggesting the company - 67% owned by the state - will look to non-core assets to fuel growth in the Czech market. "We want to significantly focus on our customer base and create a larger portion of our profits outside the core business of electricity generation," including gas distribution and mobile-phone services, to mitigate the falling revenue from electricity production, he said. 

In fact, the company has little choice. CEZ spent much of 2013 horse-trading with the EU over which assets it needed to shed to close an anti-trust case against its dominance of the Czech market. The company will focus on developing smaller co-generation units and activities, Benes added.

Still recovering

"The other source of growth is through acquisitions," Benes said. For shareholders that will offer a worrying echo from recent history. 

During the boom years, CEZ went on a shopping spree across Central and Eastern Europe under the stewardship of Benes' predecessor Martin Roman. Aiming to build itself into the largest utility in CEE, the company had snapped up assets in Albania, Bulgaria, Poland, Romania, Serbia and Turkey by 2009. 

It's still suffering the consequences in several cases. After years of losses, CEZ's local unit was stripped of its distribution licence in Albania last year. The Bulgarian watchdog is currently mulling a similar move, with the cost of electricity having sparked off the ongoing protests against the government in Sofia last year. In Romania, the government is in the midst of reducing support for renewables, which analysts say will make CEZ's project to build Europe's biggest onshore wind farm unworkable economically.

Western company?

Yet Benes suggested that somehow investors should forget that recent track record. "The perception of CEZ has for a long time been affected by the planned nuclear tender, which wasn't good news for investors, who don't look at what's going to happen in 2030," he declared. "We'll see how quickly they'll start seeing us as a western European company."

However, other elements of Benes' vague plans for CEZ are equally unlikely to offer much more confidence. 

On the one hand, he continues to insist he wants to return to the Temelin expansion. He reiterated that the company has only taken a "time-out" and the government will decide on the future of the country's nuclear sector by the end of this year. His suggestion is that CEZ should build one reactor at a time, rather than two at once.

On the other hand, plans to use the cash saved from cancelling the nuclear expansion to fund acquisitions suggests Benes is determined to fight a recent attempt by powerful Finance Minister Andrej Babis to put the company in harness to drive state spending. The billionaire minister called in March for CEZ to pay out all of its CZK35.2bn (€1.3bn) profit in dividends. The CEZ board proposed paying out just 61% of post-tax profit on April 22. The AGM in June will decide the matter.

While that resistance to state pressure might resemble the actions of a "western European" company, continued questions over the level of corporate governance at CEZ will likely keep it trading at a discount to European peers for some time. While it has proved hugely successful in wielding its power at home, the company's adventures abroad have illustrated that weakness.

Investors hardly greeted Benes' plans with enthusiasm. After dropping in morning trade in Prague, CEZ shares finished April 29 largely flat. The PX index closed 1.31% higher. The share price stands at 11.2-times estimated 12-month earnings, compared with 14.1-times for the Stoxx 600 Utilities Index, which CEZ joined on September 23, according to data compiled by Bloomberg.


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