Hungary set to buy out E.ON's gas distribution business

By bne IntelliNews August 27, 2012

Tim Gosling in Prague -

Hungary is set to buy back the country's central gas distribution business from Germany's E.ON, Prime Minister Viktor Orban claimed on August 25, apparently acting swiftly on a plan revealed last week to make energy distribution to residential customers a "non-profit" business.

"We bought back MOL shares from the Russians, we partially bought back the waterworks from the French, we will buy back E.ON within seconds from the Germans," the PM said, reports MTI. Representatives for both E.ON Hungary and the prime minister's office declined further comment.

According to its website, E.ON Foldgaz Trade Zrt is the biggest natural gas trader in the country, and supplies every Hungarian gas distributor and therefore indirectly every household customer. The previous government secured preemptive rights running to 2016 to buy the business, should E.ON decide to sell.

It was only during a speech to Hungarian diplomats on August 22 that Orban made the surprising announcement a new fight with the EU is coming that Budapest plans to make energy distribution to residential customers a "non-profit activity." An EU spokesman declined to comment at the time as to whether the plan would break market regulations, saying it was the first Brussels had heard of the plan.

Energy distribution is an area the EU strictly polices, and it is currently using its Third Energy Package to force energy giants, including Russia's Gazprom as well as E.ON, to split up vertically integrated utility businesses. It generally also insists that all distribution grid operators are private entities, although subject to control by national regulators.

Budapest, which claims to be hoping to secure a loan programme from the International Monetary Fund (IMF) and EU, has seen relations with Brussels deteriorate since the Fidesz government came to power in 2010. It has played rough with foreign investors, particularly in the banking, retail and telecommunication sectors, earning the ire of the EU over competition and other regulations. That has seen Brussels casting a much sterner eye on moves by Budapest in recently.

Little has been said for the meantime, however, as Orban's government has pursued a plan to raise state involvement in the economy, and in particular in sectors it considers "strategic". One of the earliest moves was the surprise purchase of a 21% stake in energy giant MOL from Russia's Surgutneftgaz. The shares were handed to utility MVM, which Budapest has earmarked to build into a broader energy "state champion". The government has also bought a controlling stake in car parts supplier Raba, is trying to gather assets to build a state bank to replace shrinking lending to the economy, and is in the midst of setting up a fourth mobile telecom operator.

The €1.88bn purchase of MOL in May 2011 in particular raised eyebrows, with Hungary reported to have used cash from a 2008 IMF loan to power the purchase. MOL sold its gas business to E.ON in 2005 in a deal then valued at up to €2.2bn, including debt. It is unclear from where Hungary would find the capital to fund a purchase; the country has cash in the bank for the meantime, but is cut off from international bond markets and faces significant debt repayment this year and next.

As analysts at Erste point out: "The estimated value of the deal is €1.2bn (HUF332bn), however we can't see the funding of the project in the budget, neither in 2012 nor in 2013."

That suggests further "unorthodox" government policies could be on the way, adding to the raised taxes on telecoms and banking that have been laid out to help cut the deficit starting in 2013. Certainly, spending cuts appear taboo, while during the same speech covering the E.ON assets, the PM also announced plans to cut income and cooperate taxes. Brussels and the IMF have both been badgering Budapest to raise the current 16% flat tax.

There is already much doubt over the 2013 budget, and particularly the revenue to come from the new taxes. Orban is apparently in feisty mood however, and also insisted that the government has no need to reconsider its track and that current economic policy will continue.

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