Sell Off Success

Economic News

22 Jul 2010
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Despite the mixed fortunes of Bulgaria's privatisation programme in recent years, this week has seen some much more encouraging news with the most lucrative deal to date now well onstream. With the announcement on July 15 that three companies had been chosen as preferred buyers for majority stakes in a clutch of power distribution outfits, the higher-than-expected amounts being offered caused some contentment in Sofia. Meanwhile, as if to underscore the country's key role in electricity import-export, neighbour Greece also announced its interest in buying more volts from Bulgaria.



The Bulgarian government chose Germany's E.ON Energie AG, the Czech Republic's CEZ and Austria's EVN AG as preferred buyers of 67% stakes in each of the seven electricity distribution companies (EDCs) that were put up for privatisation. Greece's Public Power Corporation A.E. and Italy's Enel S.p.A. were also bidding, though their offers seemingly failed to grab the Bulgarian government's attention.



CEZ will acquire the power utilities based in Sofia and its surrounding area, along with those in the northern town of Pleven. EVN gets Stara Zagora and Plovdiv, while E.ON will most likely get Varna and Gorna Oryahovitsa.



The sums offered by the companies varied from 140.7m euros from E.ON to 281.5m from CEZ. The Austrian bid was 271m euros.



After negotiating the finalisation of the sale contracts with the Privatisation Agency (the shares are expected to be transferred in October) the 693.2m euro EDC deal will become the most lucrative in Bulgarian privatisation's history. It is also about twice the 350m euros many analysts had been predicting. The total sum also makes Bulgaria first in price per subscriber in Eastern Europe, with a figure of 230 euros per electricity sub.



It has undoubtedly been a well managed sell off. The seven EDCs were rounded up into three groups with each sold via an independent, simultaneous tender. Naturally enough, the Sofia/Sofia region/Pleven package was the most sought after, with five companies submitting bids. Four companies bid for the other two packages.



A clue as to why so many firms might be willing to bid so much for the EDCs was perhaps then provided a few days later when Vasil Anastasov, executive director of the National Electricity Transmission Company (NETC), told Darik radio that NETC was close to a deal with the Greek Public Power Corporation. Under this proposed two-year contract, some 100-150 MW a day would be exported to Greece from Bulgaria for an undisclosed sum.



Greece is a power hungry local market, with a widely predicted shortage likely after 2005, given a high, 5% annual growth in consumption. According to Anastasov, this energy gap was already causing problems, with NETC helping out from time to time, most recently with a major power outage in southern Greece last week. The upcoming Olympics in Athens may see increased demand too in the months ahead.



Bulgaria has thus long been a regional electricity exporter of note. NETC supplies 60% of all power exports in the Balkan region, with some 70% of those heading for Greece. NETC also sells electricity to Romania, Serbia and Montenegro, and this month began transmitting to Macedonia as well. In 2003, exports to Bulgaria's neighbours stood at 6.5bn kWh, 1bn down on 2002. This was largely due to the ending of exports to Turkey, after that country terminated a long-term contract complaining that Bulgaria had reneged on an earlier commitment to give Turkish companies a number of infrastructure project contracts. Despite this, the Bulgarian electricity sector remains a lucrative business.



Meanwhile, it seems as if the government's windfall with the sale is set to continue. The minority, 33% stakes in the EDCs held by the state are also due to be sold, the price of these shares to be equal or higher than the price achieved during the sale of the 67% stake, the cabinet decided July 15.



This should mean an additional $439.8m for this 33% stake, bringing the total amount realised from the sale to around 1.033bn euros.



However, it may be a few years before such an amount can be realised. Under the terms of the privatisation, the state has undertaken to hold on to its minority stake until 2008. This is also a key year for the new owners, who are barred from disposing with any of the acquired equity until then. In addition, for three years after the acquisitions, the buyers will be obliged to certify cost-based pricing to the Bulgarian energy regulator. After that period, revenues will be capped.



Even so, the country's new electricity distribution players will likely be pleased with the deal they have - while it also comes as a welcome shot in the arm for the hard-pressed government sell-off scheme.

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