CEZ’s Bulgarian sale blighted by controversy

01 March 2018, Week 08, Issue 899

Czech energy giant CEZ signed an agreement last week to hand over its remaining business in Bulgaria, which boasts an annual turnover of US$1.2 billion, to a small, local company with only US$63 million in assets. The deal, which follows over a year of talks between CEZ and potential buyers, has faced ridicule in Sofia, and led Bulgaria’s energy minister to resign.

In a statement on February 22, CEZ said its supervisory board had approved the sale of various power trading and distribution assets in Bulgaria, together a photovoltaic (PV) plant in the west of the country and a biomass plant in the south. The buyer is Inercom, a Bulgarian company founded last year with just US$31,000 in capital that now operates 23 MW of solar generation capacity and is active in the country’s construction sector. A day later, CEZ signed a sales contract with the firm.

CEZ entered Bulgaria in 2004, when it acquired a 67% stake in three distribution companies for 281.5 million euros (US$343 million) at a privatisation auction. Since then, it has endured a fractious relationship with the Bulgarian authorities.

In 2013, the high cost of electricity caused by Bulgaria’s increasing use of green energy led to nationwide protests that ended up toppling the government. Sofia deflected the blame onto CEZ and other foreign energy companies, claiming they were colluding to keep power prices artificially high. In a knee-jerk decision, Bulgaria’s regulator slashed household energy prices by an average of 7% that year, causing CEZ to rack up heavy losses. The Czech firm launched arbitration proceedings against the Bulgarian government in mid-2016 for failing to protect its energy investments.

CEZ Razpredelenie, the company’s main distribution arm, provides power to some 3 million customers in western Bulgaria, including the capital. Trading groups Elektro Bulgaria and CEZ Trade Bulgaria sold 9.7 million MWh of electricity to end-users in 2016.

CEZ first mooted plans to divest its Bulgarian business in early 2017, reportedly entering into talks with a number of local and foreign investors. It sold a 1,260-MW coal-fired thermal power plant (TPP) in the Black Sea port of Varna to local transport company Sigda in December last year. The plant was shut down in 2015 because of stricter EU emissions rules. CEZ then decided to sell its remaining business as a single package.

In its statement last week, CEZ said that Inercom’s offer, which was later revealed as worth 320 million euros (US$394 million), was “significantly above the fair market value of the assets sold,” citing an independent appraisal. It added that its investments over the last 14 years in Bulgaria had yielded an overall positive return, despite difficulties with authorities.

According to a Reuters source, Inercom is holding talks with an international bank to arrange financing for the purchase. It is looking to source half of the necessary funds with a credit facility from two other unidentified companies, the source said. The European Bank for Reconstruction and Development (EBRD), which put together a 116 million euro (US$141 million) syndicate loan for CEZ Bulgaria in 2016, has the right to demand immediate repayment as a result of the change in ownership. The bank is deciding how to proceed, according to Reuters.


Fake news

The head of Bulgaria’s parliamentary energy commission, Delyan Dobrev, questioned last week whether Inercom had the financial muscle to run CEZ’s operation.

“Initially it sounded like fake news to me,” he said in an interview with NOVA television. “How will a company that I have not heard of until yesterday take over one third of the power distribution network in Bulgaria?”

Bulgarian Energy Minister Temenuzhka Petkova resigned just hours before the deal was signed, after admitting that she had known Inercom’s owner, Ginka Varbakova, personally for over 20 years. Speaking to reporters in Brussels, Prime Minister Boyko Borisov said he had accepted her resignation to demonstrate that his administration had no ties to the sale.

“I want to confirm … [the government] had not influenced that deal in anyway,” he was quoted as saying by Reuters.

Borisov, who was forced to resign himself amid the 2013 protests over electricity prices, later claimed the sale was a plot to topple him.

“This is the scenario of these scoundrels […] these people have toppled me from power once, now they try again,” he said in an emotionally charged speech on television on February 27. “This time there will be no resignations, I promise those people that I will expose them.”

The prime minister also claims to have received confidential documents about the deal from his Czech counterpart Andrej Babis linking it with Russian-Georgian offshore companies as well as Russian and Bulgarian banks. He has demanded that the country’s central bank and intelligence services launch an investigation.

Borisov has previously argued against calls for the Bulgarian government to assume control of CEZ’s assets, but his administration appears to be changing course. According to Finance Minister Vladislav Goranov, Sofia is now seeking a controlling stake in the business.

“The talks are at quite an early stage. We expressed clearly our will that we want to participate in this deal, one way or another,” the minister told reporters after a meeting between Borisov and Inercom’s Varbakova. He added that the government was seeking “at least a controlling stake”.

Joseph Murphy

Edited by

Joseph Murphy


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