VISEGRAD: Politicians vow another cut in state's CEZ stake

By bne IntelliNews April 15, 2010

bne -

The Czech incumbent utility CEZ has always been big business; now it's also become a big issue in the upcoming general elections scheduled for May.

In a sign of how taming the power of Central Europe's largest company has become a bipartisan issue in the Czech Republic, the leaders of the country's largest right- and left-leaning parties in April vowed live on a television programme that if they become prime minister, they would both support the government selling down its stake in CEZ from around 70% to 55%.

Critics of the giant utility, which generates almost 80% of the country's electricity, have long argued that reducing the state's stake will make politicians less willing to favour CEZ and increase governance of the utility by private shareholders. "Rent-seeking behaviour and wasteful spending would become the shareholders' problem, not that of Czech taxpayers, who today implicitly underwrite CEZ through the state's shareholding," says Jan Ondrich of Prague-based advisory firm Candole Partners.

The sale of the stake - a 25% stake would be worth about $7bn at today's share price - will also go some way to plugging a hole in the state-funded pension system.

A reduction in the state's stake comes at a tricky time for CEZ, which for years has enjoyed one of the continent's highest profit margins from a combination of low overheads from its vertically integrated structure and growing electricity prices in a region hungry for power. This has allowed it to aggressively expand across the region from 2004, buying power plants, coalmines and distribution networks from Poland to as far south as Turkey.

However, this expansion strategy hasn't been a resounding success, with particular problems in Bosnia, Bulgaria and Albania - a fact admitted by Martin Roman, CEZ chief executive, in an interview with the Financial Times in April. "We will invest much less in acquisitions than in past years," Roman told the paper. "We want to focus on nuclear and other investments in the Czech Republic and Slovakia."

For example, CEZ is planning to enter the gas market in Slovakia from 2011, with a sales campaign to start by the summer of 2010. In the meantime, the company is building the necessary infrastructure in Slovakia and creating a team of specialists. It has also qualified for the next phase in the giant Polish tender for a 50% stake in PAK, which owns three power plants and two coal mines and produces 8.5% of the country's electricity.

At home, CEZ is embarking on a huge expansion of its nuclear production by adding two more units to its existing Temelin nuclear plant by 2020, with the possibility of building three more units in the Czech Republic and Slovakia - investments that will reportedly total about €20bn. Hospodarske noviny, a leading Czech business daily, cited well-informed CEZ sources as saying that the utility would accept bids from Russia's Atomstroyexport, Westinghouse of the US and France's Areva. It is reported that lobbying efforts were made by both the US and Russian sides when US President Barack Obama met Russian President Dmitry Medvedev in Prague on April 8 to sign a treaty reducing US and Russian nuclear stockpiles. Atomstroyexport has reportedly promised that if selected by CEZ to complete Temelin, it would outsource 50-60% of the work via Czech companies including its consortium partner, local reactor builder Skoda JS.

Overshadowing this huge expansion at home and its "near abroad" is the European Commission's ongoing investigation into CEZ's market dominance that it launched in November. CEZ spokeswoman Novakova admits that the investigation by the Commission is "a logical consequence of the growth of CEZ," but argues that the European Union's regulators should not look at the Czech market alone, but at the wider interconnected European market, where it has only a 3.5% share.

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