EPH and Enel poised to sign Slovenske Elektrarne deal

EPH and Enel poised to sign Slovenske Elektrarne deal
By Tim Gosling and Robert Anderson December 16, 2015

Energeticky a Prumyslovy Holding (EPH) is poised to sign an agreement with Enel to buy a 33% stake in Slovak utility Slovenske Elektrarne (SE), both the Italian utility and the Czech-based energy holding said on December 15. The deal could even be signed this week, bne IntelliNews has learnt.

Enel and EPH have also reached an agreement in principle for the future sale of the Italian utility’s remaining 33% stake in the Slovak power producer, according to Enel CEO Francesco Starace, though spokeswoman Roberta Vivenzio tells bne IntelliNews there were still "very delicate negotiations".

“We’ve reached an agreement with EPH for the sale of our 66% stake in the company,” Starace told Italian daily La Stampa on December 15. “Around Christmas we will sell the first 33%. The second 33% will be sold upon completion and entry into service of the two nuclear units under construction [at Mochovce]: within two years.”

Any sale of the second tranche will be dependent on the Slovak government, which has insisted that Enel honoured its pledge to complete the expansion of the Mochovce nuclear plant, and that the Italian utility also grants it an option to increase its current 34% holding to a controlling stake.

Enel has come under heavy pressure from the Slovak government since it announced in summer 2014 that it wanted to divest its stake in SE, as part of a corporate refocusing on renewable and distribution assets. Bratislava has demonstrated its seriousness by seizing back control of the huge Gabcikovo hydro-electric plant, which SE had been leasing. This summer the Italian company agreed that it would sell SE – bought in 2004 for €840mn – in two tranches, one immediately and the other after it completes the expansion of Mochovce.

The long delay and rising budget of the Mochovce project, as well as the government stance, put off other potential bidders for SE. However, the closely-held EPH has not been put out.

Not deterred

Controlled by oligarchs connected to Slovak financial group J&T, the energy holding has proven it can work happily alongside the government. EPH bought a 49% stake in Slovak gas utility and pipeline operator SPP in 2013. The state holds the majority 51% stake, but EPH maintains operational control. In the case of SE, EPH could also end up with a 49% stake from Enel, with the state taking the remainder.

Despite queries over its financial ability to complete a deal following years of feverish buying across the region, and lately in the UK and Italy, EPH started exclusive negotiations in August.

"We have an agreement on the table with Enel, but there is some negotiation still to be done before it is signed," says EPH spokesman Daniel Castvaj. "Our discussion with Enel is about its full stake: 66%. For now we can confirm that we will buy 33% in two weeks or so."

The price that EPH is prepared to pay for Enel's full 66% has been speculated to be €1.3bn. However, Vivenzio rubbishes this figure. Talk of a valuation of €1.3bn is “completely groundless," she says. The book value of the 66% stake is closer to €750mn, she points out, noting that Enel has made impairments that have reduced the value of a stake it originally paid €840mn for.

Lots of options

There is also still great uncertainty over whether the state will actually increase its shareholding in SE.

"Regarding the second tranche there is a condition that it cannot be done until Mochovce is finished, but we also know that the Slovak government would like to increase its stake," Castvaj says.

“The government is not party to the [EPH] negotiations,” Vivenzio stresses, although she adds that "at a certain point they might exercise their option to increase [its] share.”

Economy Minister Vazil Hudak told venergetike.sk in an interview on December 14 that Bratislava wants a legally binding option to buy 17%. “That would then open a possibility after the completion of Mochovce to buy a package of shares that would bring a majority to the state in Slovenske Elektrarne," he said.

Bratislava had hoped to sign a memorandum of understanding, including the option agreement, with Enel on December 16. However, Fico announced the pair are still in talks. The option would last six months after operations are launched at Mochovce, he noted.

The PM appeared to be comfortable with the delay. The entrance of EPH into the shareholder structure will see the state become the biggest shareholder in SE. The introduction of the energy holding will also offer Bratislava a more trusted co-investor than Enel, which the government has hammered with furious criticism in recent years over its failures on the nuclear project.

"It must be in everyone's interest to complete Mochovce," Fico said as he welcomed the news of the deal. "Therefore, I do not think that the entry of any new owner to Slovak power plants should endanger the completion of the nuclear units. I know I can hardly imagine worse governance than that of the Italians, so it can only be only better."

On top of that, Bratislava appears convinced that it practically has the preliminary rights in the bag anyway. Finance Minister Peter Kazimir confirmed last month to bne IntelliNews that the option agreement is "already there", though he also insisted that the government was otherwise keeping at arms length from the transaction with EPH.

“We have nothing to do with the transaction,” he said. “This is not our business. It is up to Enel to arrange it with EPH," he claimed. “We have the right to exercise the option but first the Italians must finish their work.”

Hudak, meanwhile, has suggested the government will look to strengthen its control of SE via alternative "options" to simply buying shares. He reiterated that in the interview with venergetike.sk.

“We especially want to have greater transparency in the decision-making processes within Slovenske Elektrarne and to have a stronger right to interfere in financial decisions”, he said. A change in the shareholders agreement has been mentioned as one possability.

Meanwhile, the option guarantee is unlikely to be needed as insurance against EPH. Having witnessed the rough treatment meted out to Enel over the past 18 months, the energy holding would be brave to compete against the Slovak government, especially given the delicate balance of power at SPP.

It seems most likely then that, despite negotiating over Enel's full stake, EPH will split the second tranche of shares to be sold in a couple of years when Mochovce is completed with the government. Failing that, it could also presumably buy the full 33% and sell on to the state at a later date.

The second option, which would essentially mean EPH would lend Bratislava a huge wad of cash, would only deepen speculation over the energy holding's finances. EPH has a debt burden of as much as €5bn, according to speculation, and is looking to raise cash by spinning off some assets. At the same time, the company is now rumoured to be bankrolled by yuan, after mysterious Chinese conglomorate CEFC bought into parent J&T last year.