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ČEZ sale blocked from public scrutiny

Government's selection of broker is confirmed only after leak to press

By Riva Froymovich
Staff Writer, The Prague Post
May 23rd, 2007 issue

A shroud of secrecy has surrounded the government’s sale of a 7 percent stake in energy company ČEZ, after the state previously committed to an open transaction.
Rumors spread last week that Česká spořitelna will act as a broker in the historic deal — the first partial privatization of a state company through the Prague Stock Exchange (BCPP). The Czech press latched onto the news and compelled the government to confirm the leak. No other broker names, prices or dates associated with the sale would be released, the government added.
The reasoning for the government’s silence is baffling to industry experts and market observers. Typically, the privatization of government properties is a very public matter.
“The finance minister informed the government about this issue at a meeting May 14, and no information can be published,” said Jaroslav Růžek, spokesman for the Finance Ministry. “A live-broadcast sale would mean an advantage for speculators, not for taxpayers.”
Other ministers have been advised to keep mum on the deal, too.
“It was a closed meeting,” said Táňa Králová, spokeswoman for the Agriculture Ministry. “The members of the Cabinet are not giving any information.”
Back in March, the Finance Ministry sang a different tune. Minister Miroslav Kalousek said then that the ministry chose to sell a portion of its 67.8 percent holding of ČEZ on the BCPP because of the exchange’s transparency. He pledged to maintain an attitude of openness about the sale.
That openness vanished last month when, rather than use a public tender, the government requested the BCPP privately disclose the most active traders of ČEZ shares on the market. The state wanted to work with these brokers directly, and stopped trading information with the public.
“The selection of a brokerage doesn’t seem like it should be precluded from public information,” said Pavel Mertlík, chief economist at Raiffeisenbank and finance minister from 1999 to 2001.
“Such secretive behavior is really unusual [in the privatization of government property],” he said.
Furthermore, it creates speculation on the market and price fluctuations, said one insider, who asked not to be named due to the sensitivities surrounding the deal. “The more they disclose, the less volatility on the market,” he said.
“I can imagine one reason is time,” Mertlík said. The insider agreed.
The purpose of the sale, which could earn the government about 40 billion Kč ($1.9 billion), is to decrease the state deficit, expected to reach 91.3 billion Kč in 2007.
“They want to get money in this budget. A public tender is a more lengthy process, and would mean postponement by several months,” Mertlík said.
Selecting an adviser would take about half a year alone, and the money expected from the sale is already in the budget and needed by the end of August, the insider said.
The new sales route also means the broker’s fee cannot legally surpass 2 million Kč, the limit for no-bid contracts.
Normally, brokers would charge about 200 million euros ($272 million/5.7 billion Kč) for the transaction, the source said.
There are three reasons Česká spořitelna is doing the sale for almost free: the money it will make on the resale of the shares, the reputation of scoring the contract and the bank’s hopes to win “the big deal,” to act as a broker in the future sale of a larger stake in the company.
He also dismissed reports of the deal using multiple brokers.
“The government only needs one [direct] broker — it’s Česká spořitelna,” he said. As for the intermediary through which the bank will sell the shares, he suggested it could be Goldman Sachs.
“It has to be somebody with a big book, because someone has to pay almost 1.5 billion euros’ cash to the government,” he said. “If you look at the biggest brokers in the Czech Republic — Česká spořitelna, Wood & Co. and Patria — they’re all involved in the deal.”
It also appears likely that whichever company is chosen will then gradually sell the shares back to ČEZ.
At the energy company’s general meeting in April, it passed a resolution to acquire its own equity shares on the regulated markets.
“It hasn’t been disclosed yet, but I think this is the basic idea,” the insider said. If ČEZ buys back the shares, the government would end up losing only 2 percent to 3 percent control of the company. If this is not the case, the government would prefer dispersed ownership.
“They don’t want anyone to accumulate a bigger stake,” in particular foreign companies, he said — especially Russians.
European Union rules regulating share buybacks stipulate that a company can buy only one-quarter of the volume on the market, or about 300,000 shares per day. If ČEZ buys the government’s stake on the market, it would take more than 100 days.
“The government needs money much quicker, so they figure, ‘Let’s sell to an intermediary,’ ” he said.
— Naďa Černá contributed to this report.

Riva Froymovich can be reached at rfroymovich@praguepost.com


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