A State Utility Turns Up The Juice

CEZ, the local electricity powerhouse, is buying up plants around the region

Martin Roman does not have much of a view from his seventh-floor office in a gray industrial zone near Prague's medieval Old Town. But that doesn't seem to bother the chairman of Czech utility CEZ Group. Given Roman's ambitious plan to transform the once-plodding operation into a regional powerhouse, he has had little time for taking in the scenery.

These days, CEZ is still 67% government-owned, but it's far from stodgy. Already the Czech Republic's largest electric utility -- generating 73% of the country's electricity and controlling more than half of its market for distribution -- CEZ is on a shopping spree abroad. In November, CEZ acquired three Bulgarian electricity distributors for $373 million. In March it won an auction for Romania's Electrica Oltenia, although the price hasn't been announced. And CEZ is taking part in a tender for stakes in three power plants in Bulgaria and is eyeing two in Poland.

CEZ's timing is good. The Czech Republic and other new members of the European Union are growing at around 5% annually -- well above the level in Western Europe. At the same time, Hungary, Poland, Bulgaria, and Romania are privatizing their power sectors, and others in the region are planning to do so soon. "Now is the time for acquisitions," says Tomas Gatek, an analyst with Patria Finance, an investment research subsidiary of KBC Bank.

The Czech utility has the right balance sheet for its buying binge. CEZ in 2002 put its $4.3 billion Temelin nuclear power plant into operation, which means one huge investment is behind it. In 2003 the company bought five Czech power distribution companies. That doubled CEZ's revenues, to about $4.5 billion, and helped boost margins to 38% from 28% -- well above the industry average of about 30% -- says Tibor Bokor, an analyst at Prague brokerage Wood & Co. Rising power prices and its reliance on two nuclear power plants, which are cheaper to run than coal-fired facilities, have also helped boost profitability at CEZ, Bokor says.

Analysts give CEZ high marks for its restructuring of the five grid suppliers into two subsidiaries devoted to distribution and sales. CEZ says it can trim $90 million in costs by getting rid of duplication in areas such as billing and information technology -- which Roman says involves laying off a "substantial" number of the 7,500 employees involved. Already, some 500 workers have been fired. "The economy cannot grow by protecting existing jobs, only by creating new jobs," says the 36-year-old. Investors like the CEZ story. Despite falling more than 10% in March along with most other stocks traded in Prague, CEZ shares have doubled over the past year, to some $16.60.


In spite of the enthusiasm, CEZ can't coast. It has to fend off larger competitors if it hopes to keep growing. German power giant E.ON (EON ) has set aside $1 billion for acquisitions in Central Europe and last year bought majority stakes in two Bulgarian power distribution companies, giving it 25% of that country's power distribution market. Italy's Enel (EN ) in February outbid CEZ for a 66% share in Slovak utility Slovenske Elektrarne, paying $1.1 billion. "The price was so high, we told shareholders they would never get their money back," says Roman. "It's dangerous to pay a premium, because there's not much growth in these companies." He says CEZ is better placed than its Western rivals. The Czech Republic's experience as a former communist state, for one, gives CEZ a leg up. "We understand the mentality," Roman says.

Roman certainly understands a challenge. At the tender age of 24, he persuaded the board of Janka Radotin, an ailing ventilation company, to appoint him chief executive. The company's assets were frozen shortly after Roman took over, but he convinced creditors to give it a second chance and got the outfit back on its feet. He later steered Czech industrial conglomerate Skoda Holding to profitability. Now, given CEZ's performance under his leadership, the Czech government is in no hurry to privatize the company, despite earlier plans to sell it off. So don't expect Roman to spend much time gazing out the windows.

By Mary Lisbeth D'Amico in Prague

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