Prague City Hall is keen on getting full control of the capital’s gas distribution company, Pražská plynárenská, and to that end has via a public tender chosen a company to set a valuation on the firm, which investment bankers have put at roughly Kč 6 billion.
The massive deal has one very big outstanding question mark: Prague City Council does not know at the moment if the other joint manager of the gas company, German power group E.ON, is currently willing to sell.
Meanwhile, the tender winner, Czech bank Česká spořitelna, actually offered to do the work for a symbolic Kč 1. Offers from other bidders — Apogeo Esteem, Patria Corporate Finance, PricewaterhouseCoopers and UniCredit CAIB — varied between Kč 200,000 and Kč 390,000, according to documents obtained by Czech Position.
The tender to put a price on Pražská plynárenská was organized at the end of last year and offers opened in early January. All met the criteria demanded; none were excluded. Evaluations were based on the price charged for the work, 60 percent of the weighting, and method and approach proposed, 40 percent. Apogeo Esteem bid Kč 390,000, PricewaterhouseCoopers around Kč 10,000 less, Patria Corporate Finance came in at Kč 250,000 and UniCredit CAIB at Kč 200,000.
Faced with such a choice, there was not much for the evaluation committee to do — it immediately picked Česká spořitelna. The valuation has already been prepared and is in the hands of Pražská plynárenská and just has to be handed in to City Hall.
The valuation has already been prepared and is in the hands of PražskáPlynárenská and just has to be handed in to City Hall.
Act of charity?
But was such a low bid from Česká spořitelna an act of charity in such tough times of economic turbulence? More likely it appears like a bid to be chosen to help Prague City Hall as its consultant in the multi-billion crown transaction, if it goes ahead, or provide some of the financing for the deal. Consultancy would be a thin rewards for such a Kč 1 bid, but providing the financing for such a transaction would amount to a lucrative chunk of business for the bank.
Česká spořitelna is unwilling to comment on its aims. “We’re sorry but we’re not able to give out details of the specific business relations we have with clients or comment on them,” bank spokesman Jan Holinka told Czech Position. “We have long-term and broad relations with Prague [City Hall] and from time to time we are able to provide some favors,” said a high-ranking manager with the bank, who asked not to be named.
The other bidders, according to Czech Position’s information, do not Česká spořitelna’s dumping price offer as a smart marketing move, as valuating such a big company is an expensive prospect, and took the standard course on such tenders.
Česká spořitelna, however, is clearly betting that the few hundred thousands of crowns lost can be recouped: Those who carry out such corporate valuations are frequently picked to provide for investment consultancy services or financing of the transaction. It’s difficult to imagine that a rival looking to carry out the investment consultancy work could just pick up the detailed Česká spořitelna valuation and use it as the basis for negotiations with the sellers. The bank’s bet could pay off handsomely. Investment consultancy services for such transactions usually hover at around one percent of the transaction —which in this case could mean tens of millions of crowns.
Dusseldorf mission
The tender for investment consultancy services is being planned fairly soon. First of all, however, Prague Mayor Bohuslav Svoboda (Civic Democrats, ODS) would like to hold top-level talks with E.ON at its Dusseldorf headquarters to determine whether the German power giant is at all prepared to sell its minority stake in Pražská plynárenská.
E.ON, like other German power companies, has been hit by the country’s decision to retreat from nuclear power with divestment strategies announced by them totaling billions of euros. But there is no sign of Pražská plynárenská figuring on any E.ON list of sell-off targets. That list may exist for the eyes of top E.ON managers only, but it certainly has not been seen by leaders at Prague City Hall. So Prague politicians are seeking to win control of Pražská plynárenská without having signals from the German side if that could be a realistic possibility.
Prague politicians are seeking to win control of Pražská Plynárenská without being given a real clue from the German side whether that could be a realistic possibility.
Prague City Hall currently exercises control of the gas distributor via Pražská plynárenská holding, in which it has an around 51 percent shareholding with the remainder held by E.ON. The German company, however, has another block of shares outside the holding company.
The new ODS-TOP 09 coalition that took power at Prague City Hall in late November, replacing the previous partnership between the ODS and Social Democrats (ČSSD), decided to take immediate steps towards taking full control of Pražská plynárenská. The idea had, however, been raised by their predecessors in power.
The move by the biggest Czech city council in ODS hands to develop its business portfolio is not so surprising from a European perspective, where the German model of municipal utility businesses are fairly common. What’s more, regulated power businesses carry low risk and almost guaranteed returns. City councilors might also have been inspired by the possibility of mending once and for all their strained relations with E.ON, relations which show no signs of improving significantly in the short term.
See related article: Why Prague City Hall should make a grab for Pražská plynárenská
