Kellner, Křetínský and J&T to buy stake in Slovak gas monopoly

Czech billionaire Petr Kellner’s energy holding EPH is still relatively small, but that could all change within a couple of months. His joint venture with Daniel Křetínský and the J&T Group is planning its largest acquisition yet: The firm wants to buy Slovak Gas Holding, which holds a 49 percent stake and managerial control of the Slovak gas monopoly Slovenský plynárenský priemysel (SPP). The deal should be completed in the spring of 2012. The question remains as to why EPH wants the Slovak gas company.

According to Czech Position’s sources, EPH has exclusive purchase rights for a limited period.

According to Czech Position’s information, the prospective deal being negotiated by EPH CEO Daniel Křetínský — who holds a 20 percent stake in EPH — is worth around €2.5 billion. Křetínský has reportedly asked Morgan Stanley and J. P. Morgan, who are advising EPH on the deal, for €1.75 billion credit to finance the acquisition. A reported €700 million will come from the pockets of EPH’s shareholders.

According to Czech Position’s sources, EPH — of which Kellner’s PPF owns 40 percent, J&T 40 percent, and Daniel Křetínský 20 percent — has exclusive purchase rights for a limited period. EPH spokesman Martin Maňák declined to comment on the deal.

A third or all? Rather all

According to our source in Slovak Gas Holding (a consortium of Gaz de France and E.ON Ruhrgas), EPH began a due diligence study of Slovak Gas Holding around 10 days ago and should take six to eight weeks. In June speculation emerged in the Slovak press that EPH was looking to buy just a third of the gas firm, but the information was not accurate. The quest to raise €1.75 billion indicates that EPH has all Slovak Gas Holding shares in its sights, and consequently a 49-percent stake in SPP.

Another reason for concluding EPH is set on acquiring all of Slovak Gas Holding is not the fact that Kellner, who without question calls the tune in EPH, doesn’t like acquiring minority stakes: His transactions are always more complex than they appear from the information that filters through to the public domain. EPH would not be able to raise €1.75 billion credit for just a third of the Ex-minister of economy Ľubomír Jahnátek expects the foreign shareholders to sell all of Slovak Gas Holding to EPH. company and subsequently around a sixth of SPP (what’s more such a sum would be far too high for a stake of around 33 percent). To extend €1.75 billion, the creditor banks would also require EPH to draw far higher dividends than a 33 percent stake would yield.

It’s probable that the agreement between EPH and Slovak Gas Holding’s current owners, Gaz de France Suez and E.ON Ruhrgas, is like this: EPH will buy a third of Slovak Gas Holding with the option of acquiring all the shares in the company, and additionally profits will be divided among Slovak Gas Holding’s shareholders such as to enable EPH to pay back the loans to banks. Then within two or three years, EPH will be able to take control of all of Slovak Gas Holding, and consequently 49 percent of SPP.

Indeed, Slovak ex-minister of economy Ľubomír Jahnátek (Smer-SD) has said he expects the foreign shareholders to sell all of Slovak Gas Holding to EPH. “Europe’s already small fry for them. They’re not making as much here as they used to. They want to expand to where they’ll be successful and they have their sights set on South America and Asia,” the former minister said recently.

While Morgan Stanley and J. P. Morgan are advising EPH on the deal, Deutsche Bank is advising E.ON Ruhrgas, and Goldman Sachs and Citibank are advising GDF Suez.

GDF Suez and E.ON Ruhrgas each hold a 50-percent stake in Slovak Gas Holding. Through the holding the two companies bought the 49 percent stake in SPP in 2002 for 123 billion Slovak crowns (around Kč 93 billion at the time). The Slovak state retains 51 percent of SPP, but the firm is gradually losing its dominant share of the local market. Following the entrance of Germany’s RWE and Gazprom-owned Vemex, SPP’s market share is now around 75 percent. On the other hand, three years ago SPP entered the Czech gas market where last year it sold 600 million cubic meters of natural gas.

Why are the giants selling?

GDF Suez and E.ON Ruhrgas have reaped rich returns from their investment into SPP, thus it’s logical that they looked to sell their stakes. Indeed, a trend has started that is seeing energy giants offloading their central and eastern European portfolios, often to local players who have grown considerably in recent years.

European parent companies that for some reason need cash (for example, to lower their debts) are looking firstly to sell assets on the periphery of their home region. Such was the case with Dalkia Czech Republic, for example, in which EPH raised its stake to 10 percent earlier this year. GDF Suez has comparatively large debts, and in its latest investment plan E.ON Ruhrgas clearly states that it is looking to sell a number of assets.

Yet according to information from the market, differences have arisen between the German and French companies over the running of Slovak Gas Holding, thus this also may be a key reason for their decisions to sell.