October 19, 2017 / 12:40 PM / a year ago

Czech election front-runner likely to put stamp on state-owned CEZ

PRAGUE (Reuters) - Andrej Babis say he wants to run the Czech Republic like a business, which may mean upheaval is ahead for the country’s biggest state-controlled business, the utility CEZ.

Cars drive past election campaign posters of the leader of ANO party Andrej Babis in Prague, Czech Republic October 18, 2017. The poster reads: "Stand up against corruption and stop babbling". REUTERS/David W Cerny

The billionaire Babis has a history of confrontation with CEZ management, and with his ANO party leading in polls ahead of parliamentary elections on Friday and Saturday, he may soon have the power to take on the management he feels has steered the company adrift.

“The fact that CEZ is out of his control and he doesn’t have a decision in it has bothered him quite a bit,” Jiri Pehe, a long-time political analyst and director of New York University in Prague. “As one of the top businessmen in the country, he simply wants to have CEZ under his control.”

CEZ is 70 percent state-owned, and with market capitalization of $11.3 billion, is the Czech Republic’s largest listed company.

As such, it has long played a central role in Czech politics. It is the government’s cash cow, paying the largest dividends among state-controlled companies to the state coffers. Its investment projects provide big-ticket orders for numerous Czech suppliers.

Its chief executive, Daniel Benes, has led the company since 2011, after joining the board six years earlier. His contract has another four years to run.

He has enjoyed the backing of previous prime ministers, including the outgoing Social Democrat Bohuslav Sobotka. That will probably end if Babis takes power following Saturday’s elections.

A billionaire whose own businesses include food, chemical and media holdings, Babis has long maintained that CEZ has too much influence on political parties, a charge he repeated most recently in an interview published this week.

“In my view, one state firm cannot run all political parties and cannot be a piggy bank for politicians,” Babis told the magazine Tyden. A CEZ spokesman declined to comment on his remarks.

As finance minister from January 2014 to May of this year, Babis clashed with CEZ management but did not have enough power to make big changes. As prime minister, he would have more of a say, and he could reshape the supervisory board that appoints management.

Over the past year, Babis has criticized a dividend cut, a potential sale of a coal plant and a proposal now under consideration to spin off regulated distribution and renewables assets.

The proposed spin-off would separate and potentially sell CEZ’s distribution and renewables businesses while the government would take full control of its nuclear and coal plants. That in turn would allow the government to take over the construction of new nuclear plants.

Instead, Babis says CEZ should finance the construction of nuclear plants itself. CEZ management has refused to do so without explicit state guarantees to help fund the project.

The proposed spin-off “is the first thing the government will have to solve,” said Miroslav Frayer, who covers the utility for Komercni Banka.

Michal Snobr, a long-time CEZ investor who represents a group that holds close to 1 percent in the company, said he expects things to change after the election.

“Given how Babis is presenting it, there are likely to be changes in the CEZ leadership,” Snobr said.

“This management has made so many mistakes that in a normal business environment, changes would have happened long ago,” he said. He cited long outages at CEZ’s nuclear plant Dukovany, lack of company strategy and current initiatives, such as buying high-priced German wind plants.

Snobr said a spin-off of CEZ, along the lines of the split of Innogy from RWE in Germany, should go ahead given the high valuations of regulated businesses. Babis may change his view after the election, he added.

And CEZ could not finance new nuclear plants without state backing, Snobr said, because such a costly project would not be commercially justifiable and would spark lawsuits from other shareholders.

Reporting by Michael Kahn, editing by Larry King

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