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Romania's Fondul Proprietatea urges govt to block Hidroelectrica's bid for CEZ assets

Romania's Fondul Proprietatea urges govt to block Hidroelectrica's bid for CEZ assets Johan Meyer - Lead Portfolio of Fondul Proprietatea

BUCHAREST (Romania), June 23 (SeeNews) - Romanian investment fund Fondul Proprietatea [BSE:FP] on Tuesday urged the ministry of economy and energy, as majority shareholder of hydro power producer Hidroelectrica, to reject the company’s request to submit a binding offer.

Fondul Proprietatea strongly believes that the potential acquisition of CEZ assets by Hidroelectrica would not create value for the company's shareholders and would affect its listing process and potential valuation, which would hinder Romania’s chances of being upgraded to MSCI Emerging Market status, the investment fund said in a statement.

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Hidroelectrica is 80.06% owned by the Romanian state, while Fondul Proprietatea holds a stake of 19.94%.

In March, Hidroelectrica said it is seeking the approval of its shareholders to submit a final bid to take over the assets of CVEZ in Romania.

"If it goes ahead with this transaction, over the long-term, Hidroelectrica risks reversing the progress it has made in cost-efficiency and profitability since its days of deep financial struggles," Franklin Templeton Investments and Portfolio Manager of Fondul Proprietatea CEO, Johan Meyer, warned.

In the investment fund's view, in its current structure, Hidroelectrica is optimally placed to overcome the current challenging environment.

 Acquiring CEZ' assets risks diluting the overall value of Hidroelectrica, given that the electricity supply business and the renewables assets that are currently targeted generally have a reduced profit margin as compared to Hidroelectrica’s current hydro power operations, Fondul said.

Also, the company has no proven track record in managing these types of assets and dealing with subsequent integration challenges. Hidroelectrica would enter the retail market, thus increasing costs and by taking over the administrative burden and financial risk of having individual clients. The energy retail market is generally more volatile and therefore riskier than the wholesale market, in which Hidroelectrica predominantly operates.

Hidroelectrica would also take onboard the specific risks to the new business sectors, Fondul said. In the case of renewables, for example, Hidroelectrica would take over the regulatory risk related to green certificates. In the fund's view, the discount proposed for accepting this risk is insufficient and may lead to an overpriced transaction, which would certainly be to Hidroelectrica’s detriment.

Hidroelectrica’s IPO would be obstructed and delayed, due to the time and resources required for the integration process, the investment fund said, adding that the company’s attractiveness for investors and its eventual valuation may be reduced with the inclusion of the new business activities, in which it has no track record, and which could only generate limited returns.

Moreover, the value of the potential transaction is not public and shareholders cannot approve the submission of a binding offer without such an important information. Also, the final terms of the consortium contract for the submission of a binding offer that include the obligations of Hidroelectrica were not made available to shareholders, Fondul said.

The minority shareholder also said that Hidroelectrica would become indebted following this transaction, borrowing funds to invest in lower performing sectors, thus limiting its potential to generate profits and reducing the value of dividends. Therefore, the Romanian state would risk its revenues being slashed at a time when it needs higher financial resources.

If Hidroelectrica acquires CEZ' assets, the state’s involvement in the energy sector would increase, which is contrary to the principles of liberalization.

"To be clear we have always supported and continue to support investments at Hidroelectrica that are beneficial for the company and are value-enhancing, such as refurbishments that extend the lifecycle of existing assets and increase efficiency. Unfortunately, in our assessment this proposed acquisition does not meet the hurdle of generating additional value for shareholders that outweigh the risks inherent in such a transaction," Johan Meyer added.

Launched in December 2005, Fondul Proprietatea was established to compensate Romanians for their properties were confiscated by the former Communist government. Following an international tender announced in December 2008, Franklin Templeton Investments was officially appointed as investment  manager and sole administrator of the fund in September 2010.

Fondul Proprietatea's shares traded flat at 1.2350 lei ($1.39/1.24 euro) as at 1236 CET on Tuesday on the Bucharest Stock Exchange.

(1 euro=4.8428 lei)

Hidroelectrica SA is among the biggest companies in SEE, for more reference take a look at Top 100 companies