James de Candole of Candole Partners -

In 2009, CEZ acquired a 76% stake in the Electricity Distribution Company of Albania for €102m. On June 24, it ‘sold’ its stake back to the Albanian state for €100m, payable over the next four years.

In 2009, PPF Group bought into the Czech energy group Energeticky a prumyslovy holding (EPH) for €110m. This week, PPF sold its stake to EPH’s other shareholders, Daniel Kretinsky and J&T, for an estimated €1.1bn.

It is a measure of how very low expectations of CEZ have sunk that this humiliating evacuation from Albania is seen by many as a partial success. So CEZ got to keep its trousers, but it lost its shirt.

Taking the cost of financing into account (CEZ borrowed the money to acquire the Albanian business) and the fact that it could have made a lot more had it invested the money elsewhere (in a deposit account at UniCredit, for example), the settlement announced this week is much worse than it sounds.

Likewise, it is a measure of how very high expectations of EPH have risen that PPF’s timely and highly profitable exit from the energy holding is being seen as a great success – for the new owners.  

In simple terms, CEZ and PPF both invested €100m in 2009. Five years later, CEZ got back a lot less than it put in and PPF got back 10-times more.

But what did EPH’s new owners get for €1.1bn? EPH today is exposed to falling power prices and to a change in management at CEZ, with the collapse in goodwill between the two firms that this might entail.  

Very soon, EPH might find itself between a very hard rock and a very rocky place. For as long as power prices were twice what they are today, and for as long Martin Roman and his cronies were in charge at CEZ, EPH’s business model made good sense.

But what, for example, will be the impact on EPH from CEZ, forced by low power prices and a majority shareholder (the Czech finance ministry under Andrej Babis) intent on protecting his plunging dividends, of cutting the fat off its service contracts with the half dozen power engineering companies owned by EPH?

Of course, any comparison of CEZ, EPH and PPF is unfair to CEZ. EPH and PPF are privately owned businesses, managed in the interests of their owners. CEZ is a state-owned business managed in the interests of its suppliers, its managers and their business partners in politics and among professional services firms.  

The true measure of Daniel Benes’ ‘success’ is not how much money CEZ has lost, for example on its reckless investments in the Balkans: it is how much money its suppliers, managers and their business partners have all made, for example on the acquisition of 50% of a German coal mine called Mibrag, which CEZ then sold on to EPH for much less than it had spent on acquiring the stake in the first place.

A much fairer comparison – and no doubt a comparison that these individuals make among themselves – is how much the likes of Roman, Benes and Vladimir Schmalz (head of foreign acquisitions at CEZ in the boom years) were worth when they joined CEZ, and how much they are worth today; or a comparison of how much CEZ’s suppliers were worth ten years ago and now. By this measure, Petr Kellner would not look quite so outstanding set against Roman, or Kellner's PPF set against Skoda Power.

The fact that CEZ itself has been so instrumental in the success that its competitor EPH enjoys today tells you much more about the integrity of CEZ’s shareholders, auditors and management than it does about the business acumen of a poster boy like EPH chairman Kretinsky.

And even if Roman is not a hidden shareholder in EPH today (26% of EPH is now held by J&T's private equity structures, with the rest owned by Kretinsky and Patrik Tkac), the fact remains that the special relationship between CEZ and EPH is under very severe threat today.

If Benes survives as CEZ chief at the AGM on June 27, it will be because EPH and its hidden shareholders have fought hard to keep him in place. But no deal to save Benes and those who stand behind him will alter energy market fundamentals. To put it crudely, the time has come for the majority shareholder of CEZ - ie. the Czech state - to decide between CEZ and the rest.

The Czech establishment can continue to plunder CEZ and to help the firm’s cosseted business partners, in which case CEZ will eventually go under. Or it can save CEZ, by behaving like PPF’s owners, in which case those cosseted business partners will be the ones to go under.