Nicholas Watson in Prague -

News that the Prague City Assembly voted on December 12 in favour of buying out E.ON's stake in gas company Prazska Plynarenska has led to speculation about which energy company will brought in as a new strategic investor. However, this misses the more crucial issue: yet another dissatisfied foreign investor has turned tail from the Czech Republic.

Councillors decided to back the city council's proposal to exercise its pre-emptive rights to buy E.ON out for CZK2.1bn (€76m). In return it will take over the German utility's 49.3% stake in Prazska Plynarenska Holding (PPH), to add to its existing 50.65% stake. PPH holds a wafer thin majority of 50.2% in Prazska Plynarenska (PP), which is the major provider of gas to the capital. Prague will also buy E.ON's 49.35% direct stake in PP.

The council has made no secret of the fact that it intends to bring in a new strategic partner to run the highly profitable company, which last year made over CZK600m. There are four candidates in the running: German company Energie Baden-Württemberg Aktiengessellschaft (EnBW), Czech energy firm Energeticky a Prumyslovy Holding (EPH), the powerful local businessman Karel Komarek's KKCG and, inevitably, state utility CEZ. The council announced its intention to buy the stake on December 10, just hours after CEZ had revealed it had offered to buy E.ON out.

"Cooperation between the City of Prague and CEZ, which has extensive experience in customer care and is also the largest alternative supplier of gas, would allow improving the quality and extending the scope of services for Prague's citizens," CEZ said in a statement.

E.ON has been angling to divest the stake in Prazska Plynarenska for over a year now. It acquired the asset in 2006 from peer RWE, in a share swap that was driven by the European Commission's desire to see more competition on the Czech market. But E.ON's ambition to restructure and reform the bloated municipal utility into a lean, efficient operation producing high dividends for the shareholders was thwarted at every turn by the various parties in local government, who regard the gas firm as little more than a gravy train, say industry sources.

A look at the complicated share structure goes some way to explaining E.ON's dissatisfaction. E.ON's overall shareholding in Prazska Plynarenska amounts to more than 70%, but due to the holding structure it is in effect a minority shareholder, while the city exerts control via its slim majority in PPH. German efforts to take full control of Prazska Plynarenska over the years came to nought, as various local parties are not interested in increasing the dividends to the city, but are more concerned with using the utility as a cash cow.

It is for this reason that Prague city was so determined not to let its pre-emptive rights lapse. That would have allowed the German utility to hold an open tender for the stake - a level of transparency and openness increasingly frowned upon in this corner of the Europe.