CEZ acquires 56% of Severoceske doly

The Cabinet has decided to sell its 56% stake in Severoceske doly (SD) to CEZ for CZK 9.046bn. The price offered is below our estimate of CZK 10bn. However, the state also received CZK 2bn in dividends from SD in 2003 and 2004. The transaction is positive for CEZ from the strategic point of view. Also, the offered price is fair and so we are more confident that CEZ will not overpay for any future acquisitions. The price is slightly above Penta’s CZK 11bn counter bid (CZK 9.046bn plus CZK 2bn in dividends). This should remove the possible risk of the sale being questioned in relation to a state subsidy. The transaction is subject to anti-trust and EC approval. We expect the market to react positively to the acquisition despite the fact that CEZ’s success in the bid was widely expected.

Separately, Moody’s upgraded CEZ Finance’s senior unsecured debt to A2 from A3. The upgrade is associated with M&A risk after the failure to acquire Slovenske Elektrane. Moody’s doubts that CEZ will use the whole EUR 3bn capacity for acquisitions. The upgrade also reflects the improved business risk profile and the restructuring, strong financial profile supported by high electricity prices and strong cash flow generation.