CEZ's decision to exit Bulgaria, taken on February 23, 2018 and even though the departure had been mulled over for at least five years, has rocked the country's political establishment. The Czech group's Bulgarian holdings led Bulgaria's energy sector in terms of revenues - more than two billion levs annually - and customers - more than three million. The importance of CEZ means that any perception of a mishap during the transition to the new owner could easily topple the government. As it already happened before.
"Bastards, real bastards, somebody wants to repeat the February events all over again," prime minister Boyko Borissov exploded in reaction to the announcement that Inercom, a previously unknown company had been selected to acquire CEZ's Bulgarian subsidiaries. It was not clear exactly who Mr Borissov had in mind when he uttered the word "bastards", but the February events referred to street protests against his own government in 2013, sparked by high electricity bills. Prior to turning against the government, the protests had targeted the country's electricity providers, mainly CEZ. In the face of growing discontent, in February 2013 Mr Borissov had quickly tendered his government's resignation. He later claimed that "the long hand of Moscow" was behind the protests.
In response to the sale of CEZ's Bulgarian holdings - which include electricity distribution, supply, generation and services - most local politicians, not only government ministers, have voiced dismay at the selection of a buyer with annual revenues equal to a paltry 3% of those of CEZ's various businesses in Bulgaria. The opposition Bulgarian Socialist Party has staged marches protesting the sale, claiming it serves unidentified players in circles associated with the Boyko Borissov's ruling GERB party.
Immediately following the announcement of the sale, the government discussed acquiring a controlling stake in either CEZ's local holdings or Inercom, but took no decision. Such an unusual proposal was even more puzzling in that, only couple of days before that, the prime minister opined that the state is a bad owner. later his opinion changed - probably the the ghosts of 2013 still haunt Mr Borissov and he doesn't want to take any chances.
Of course, the government's opposition to the deal might mean that it was truly surprised that somebody who was supposed to win the deal mysteriously lost it.
Run, CEZ, run
Back in December, 2016, CEZ announced that it had received letters of interest in its Bulgaria holdings from a number of potential bidders. CEZ had been sounding out the market since at least 2013 but no large companies had shown interest in acquiring the Czech conglomerate's Bulgarian assets. Prior to the present sale, CEZ had only been able to find a purchaser for its thermal power plant in Varna, which had been in mothballs since 2014.
Declining profitably of utilities worldwide appear to have made C EZ's search for a buyer all the more difficult, as did domestic factors unique to Bulgaria. Since 2010, the Bulgaria's government has pressured power distribution companies to keep consumer prices low. As a result CEZ's share of the final prices paid by customers) fell from 32% in 2008 to 18% in 2018.
Tensions within Bulgaria vis-a-vis the energy sector had risen in the winter of 2013, with nationwide demonstrations protesting against high electricity bills. Seeking a scapegoat, Prime Minister Borissov threatened to revoke power distribution companies' licenses, although very little blame could be assigned to them for the high price. Bulgaria's independent energy regulator duly suit and attempted to revoke CEZ' licenses. Investigations and levying of fines followed, most of which were challenged by CEZ and subsequently revoked by courts. In July, 2016, the CEZ Group announced it had filed a request for international arbitration over what it claimed was Bulgaria's failure to observe investment protection provisions of Energy Charter Treaty. CEZ's claim amounts to hundreds of millions of euro, CEZ said without giving details.
CEZ also became mired in the murky relationship between business and politics in Bulgaria. CEZ appointed politically connected players to the managing boards of its Bulgarian units, thus opening the door to pressure from politicians, interest groups, and even organized crime. Being a majority state-owned company in the Czech Republic with a similar experience at home (several inconclusive investigations were made over alleged kick-backs paid to politicians), it didn't bother to fight back and readily obliged.
For example, between 2009 and 2013, during PM Borissov's first government, Dimitar Stefanov, aka Karateka, was appointed to the managing board of CEZ Bulgaria. Mr Stefanov had formerly run companies connected to Roumen Nikolov, aka Pasha, a one-time leader of the notorious SIC, an organization that offered protection services in the early-1990's and later went on to become a leading insurance company. Mr. Nikolov is also an ex-business partner of PM Borissov. In 2013, in response to questions from reporters about Stefanov's appointment to the board of CEZ Bulgaria, a spokesperson for the Bulgarian Ministry of Economy, until 2011 owner of 33% stakes in two CEZ subsidiaries in Bulgaria, answered that Mr Stefanov had been directly appointed from the Czech company's headquarters in Prague.
A dubious choice
On 23 February, the board of directors of CEZ in Prague decided to sell off its subsidiaries in Bulgaria to Inercom, a previously little known player, this following several months of negotiations. The company is owned by Ginka Varbakova (although her husband Slavtcho Varbakov appears to be real driver behind), operating a large photovoltaic park, but has no other experience in the energy business. To seal the agreement, Inercom paid a deposit and was left with nine months to secure the balance of the financing.
Inercom was far from being a favorite at the outset of the selection process. By the end of 2017, the leading candidate was Future Energy, a small, rapidly growing energy trading company based in Sofia. Future Energy had secured financial backing of Indian Power, a multibillion-dollar conglomerate in India. The sudden and unexpected bankruptcy of Future Energy in December 2017, however, opened the way to other bidders. There is a lot of speculation that the bankruptcy was a result of foul play on behalf of the other competitors, but Future Energy itself, did not comment on the matter.
Following the demise of Future Energy, Energo-Pro - a Czech energy company and owners of the power distribution grid in Northeastern Bulgaria - emerged as the leading contender. It was Inercom, however, that submitted the winning proposal. It offered purchase price of 320 million euro, far and way well above the bids of the other competitors. Given CEZ Bulgaria's 70 million euro EBIT in 2017 and considering that the normal offer for a low-growth business would be five times annual profit before interest and taxes, Inercom is probably overpaying somewhere near 100 million euro for the 67% stake it is acquiring. "Inercom's offer is significantly above the fair market value of the assets sold, as determined by an independent appraisal, and brings a positive return on the investments in Bulgarian assets," according to an official statement by CEZ.
Suspicions of collusion arose when it emerged that Ginka Varbakova, the owner of Intercom, and Bulgaria's Energy Minister Temenuzhka Petkova were personal friends. Following an initial uproar, Ms. Petkova offered her resignation, despite absence of evidence of any connivance or misdoing on her part. In the end, the prime minister refused to accept her resignation and she remained in office.
According to Ms. Varbakova, Inercom has no clandestine backers. "We and the banks [without naming one] are alone in the deal," she has responded when the question arose in a number of interviews. It is unclear, however, why the banks agreed to provide Inercom with requisite credit. Inercom's business activities a 23 MW photovoltaic park and a mid-size construction company - could not possibly generate the sufficient money for its equity stake in the deal, nor it can use its own assets as a guarantee for substantial bank credits, neither CEZ's assets in Bulgaria can, because under the law energy infrastructure is an element of national security and can't be used as a collateral.
It is interesting that at the beginning Inercom and Future Energy planned to team up, but later gave up the option. Both companies knew they didn't have the required financial means, but later they somehow found financial backing. Future Energy attracted Indian Power, while what Inercom did remains an enigma.
According to leaked information Inercom payment's were initially guaranteed by two offshore firms owned by a Paata Gamgoineshvili, a Russian businessman of Georgian descent and investor in Bulgarian real estate. Various sources to Capital newspaper have noted, however, that Gamgoineshvili was not the actual guarantor and Ms Varbakova later claimed that he is not a party to the deal. At the same time, The state-owned Bulgarian Development Bank, one of the banks Inercom claimed to back its offer, also vehemently denied its participation.
The bottom line is that Inercom seems to have neither the experience to run a big and complex energy business, nor the money to pay for it. Inercom hastily created a very primitive website once it became evident that the company might win the deal, just to show its not a shell company, hiding the real bidder for CEZ's business in Bulgaria.
There are several possible explanations for CEZ's selection of Inercom as purchaser.
It may be that CEZ had wanted to exit Bulgaria quickly, in advance of a decision in an arbitrage case initiated by the Austrian company EVN, another owner of a power distribution company in Bulgaria. EVN filed its complaint at the International Centre for Settlement of Investment Disputes in Washington and is now awaiting a final ruling. The outcome will show what is to be expected from the arbitration cases filed later by CEZ and Energo-pro, on identical ground as EVN. CEZ may fear that if it wins its arbitration case, the Bulgarian authorities will attempt to recover part of any amount awarded by the arbitration court from its holdings in Bulgaria.
It may also be that Inercom is a cover for business interest connected to CEZ itself. This is a theory actively spread in Bulgaria and the Czech Republic by those who mistrust Ms Varbakova as a serious investor. This could explain why the Czech company accepted Inercom's questionable financial abilities.
Inercom has a previous record of dealings with Czech companies The company's investment in photovoltaics was initially backed by Zdeněk Zemek, a Czech steel magnate, who later withdrew backing due to disagreements with Ms Varbakova. More than that Mr Zemek is not in good terms with CEZ and claims he has nothing to do with the sale of CEZ's holdings in Bulgaria.
Ms Varbakova's husband, appears to have had some contacts# in the past with companies connected to SIC. In a short leaved company - MMS Entertainment, Slavrcho Varbakov was co-owner with Evegenia Kalkandjieva, who runs a modeling agency linked to SIC. People related to SIC (as the above mentioned Dimitar Stefanov) were appointed in CEZ Bulgarian managing board during the first GERB government (2009-2013). This connection has raised widespread suspicion that Inercom's Czech contacts might be Bulgarian. But there is nothing more than circumstantial evidence to prove that.
Of course, there might be no intricate game of hide and seek the real investor. In the end, CEZ's motives for the sale to Inercom might simply be a pressing desire to get out of Bulgaria by selling its holdings as quickly as possible to the first party offering a good price. Ms Varbakova could be just a lucky player who placed a bet, unexpectedly won the deal, and now needs to find financing to finalize the acquisition of CEZ's assets in Bulgaria.
CEZ's decision to exit Bulgaria, taken on February 23, 2018 and even though the departure had been mulled over for at least five years, has rocked the country's political establishment. The Czech group's Bulgarian holdings led Bulgaria's energy sector in terms of revenues - more than two billion levs annually - and customers - more than three million. The importance of CEZ means that any perception of a mishap during the transition to the new owner could easily topple the government. As it already happened before.
"Bastards, real bastards, somebody wants to repeat the February events all over again," prime minister Boyko Borissov exploded in reaction to the announcement that Inercom, a previously unknown company had been selected to acquire CEZ's Bulgarian subsidiaries. It was not clear exactly who Mr Borissov had in mind when he uttered the word "bastards", but the February events referred to street protests against his own government in 2013, sparked by high electricity bills. Prior to turning against the government, the protests had targeted the country's electricity providers, mainly CEZ. In the face of growing discontent, in February 2013 Mr Borissov had quickly tendered his government's resignation. He later claimed that "the long hand of Moscow" was behind the protests.
