Does EPH have a deal with the Russians? If not, SPP buy looks dubious

The owners of Czech energy giant Energetický a Průmyslový Holding (EPH) are either naïve and do not truly understand the gas industry or they are more cunning than given credit for and have an agreement with a Russian ally. Otherwise, its plans in Slovakia on the surface, at least, are questionable.

EPH, which is owned by the PPF Group of Czech billionaire Petr Kellner, the Czech/Slovak private equity group J&T and Daniel Křetínský (another billionaire), is looking to buy a stake in Slovenský plynárenský priemysel (SPP), the Slovak gas monopoly. In all likelihood, they are looking to acquire a 49 percent in SPP in the hands of Slovak Gas Holding B.V., a joint venture of Gaz de France Suez and Germany’s E.ON Rurhgas, since 2002. (The Slovak state, via the National Property Fund, has a 51 percent stake in the strategic enterprise.)

According to Czech Position’s information, the prospective deal being negotiated by EPH chief Křetínský is worth around €2.5 billion, and EPH — of which Kellner’s PPF owns 40 percent, J&T 40 percent, and Křetínský 20 percent — has exclusive purchase rights for a limited period.

Let’s assume an entity that has no deal in place with Russian gas interests buys Slovak Gas Holding (note that Gazprom was part of a consortium winning the privatization of SPP but never entered the company). In such a case, investing roughly €2.5 billion makes no sense; no European energy concern would be keen on the stake. Why then would EPH — a group of private equity investors with a short- or at most medium-term investment plan? It’s a mystery. Few would find such an investment attractive, let alone EPH. And that would likely be the reason that the Germans and French were looking to make their exit.

Why not to buy

The first serious problem is posed by the long-term contract between SPP and the Russian suppliers of gas— the purchase price of which is tied to the price of oil, which in recent years has been quite high. On the other hand, thanks to the liberalization of the market in Europe, there is plenty of gas to go around and spot prices are markedly lower than for oil.

© ČTK, ČESKÁ POZICE

Billionaires Kellner and Křetínský may be buying the SPP stake just to sell it on to Russia’s Gazprom

This price difference means that gas bought from Russia under these conditions sells worse on the market. Furthermore, contracts are of the “take or pay” variety, meaning the company must take the contracted amount from the supplier or pay a substantial penalty.

If not only SPP but also other firms in Central and Eastern Europe want to sell their gas, they face huge pressure to cut margins. In recent times there have been cases of gas suppliers taking losses in order to hold on to big customers. Now, thanks to liberalization, it’s possible to see literally brutal growth in the competition and appetite of aggressors on the gas market in combination with enormous influence of end client to change suppliers.

The situation is negatively reflected in the retail sector, where gas companies are losing market share. When Slovak Gas Holding B.V. bought the 49 percent stake in SPP back in 2002, the company had a 95-percent share of the Slovak market; last year, its share was a mere 75 percent (thanks to the entrance of Germany’s RWE and Gazprom-owned Vemex).

Another problem is the revenues from transit fees for the transmission of gas to Europe. In this respect, SPP is doing well, but time is working against it. Russian gas entities have in recent years crafted a new transit policy that aims to circumvent Ukraine. Gas from the East will flow to Germany via the Nord Stream pipeline and the southern European countries will be supplied via the South Stream. And then there’s the Nabucco pipeline, the EU’s own project. SPP’s pipelines will cease to be the main route for Gazprom and other Russian suppliers to Europe.

All of this means that SPP’s pipelines will cease to be the main route for Gazprom and other Russian suppliers to Europe. In the long term, experts do not see the upside of the transit business but rather declining profitability.

Another income source for SPP stems from the distribution of gas, but in this case the business is regulated.Profitability hovers below 10 percent, which for private equity investors isn’t especially interesting.

SPP this year plans to increase gas prices by up to 40 percent. “It’s a crazy proposal. This government is putting monopolies’ profits above the people who need the gas for cooking. These days, the minority shareholders of SPP do as they please,” Slovakia’s ex-Prime Minister Robert Fico declared in May, taking the Slovak Gas Holding owners to task.

According to the EU statistical arm Eurostat, in Central Europe it is the Hungarians who pay the most, followed by the Poles, Czechs and Slovaks — at least for now. If the 40 percent price hike goes through, Slovakia would overtake Hungary and rank among the countries with the highest household spending on natural gas. This means that another price hike would cost the Slovak politicians and regulators dearly.

Why to buy it

The negatives as for SPP’s future earnings can become positives if and when Russian interests acquire Slovak Gas Holding.