SEPTEMBER 14, 2014 BY ZOLTÁN KOVÁCS
BUDAPEST BEACON: “E.ON refused to allow the government to investigate the business before signing the letter of intent. Even then the value of the company had been appraised at EUR 380 million the year before. The government ended up paying more than twice as much. According to the terms of the letter of intent, the EUR 875 million purchase price cannot be changed. It provides for the government to conduct due diligence but the result does not affect the price. It’s inconceivable!” – Mária Zita Petschnig, economist
Hungarian economist Mária Zita Petschnig told ATV’s Olga Kálmán on Thursday that the purchase of E.ON’s business units in Hungary dealing in natural gas was “a success story for certain business circles but a huge loss for the national economy as a whole”. According to Petschnig, the purchase price agreed on in November 2012 “did not take into consideration certain risks, particularly in the wholesale business unit”.
Recently Hungary’s highest court, the Curia (Kúria) ordered the release of documents classified by the government concerning its purchase of two business units owned by German energy giant E.ON’s Hungarian subsidiary, E.ON Hungaria, for EUR 875 million (HUF 260 billion) in 2013. The business units in question were E.ON Trade, a gas wholesaler with a contract to purchase gas from Gazprom (inherited from Mol Zrt.) that expires in 2015, and E.ON Storage, a company owning extensive gas storage facilities.
Reportedly when the Hungarian government initially approached E.ON about acquiring E.ON Storage, E.ON Hungaria insisted it acquire E.ON Trade as part of the deal.
In March 2013 state-owned Hungarian Electric Works (MVM) purchased the two business units for the price specified in a letter of intent concluded on November 28 the previous year. It did so despite the deal being opposed by virtually every member of government except Prime Minister Viktor Orbán himself, who reportedly insisted the deal go through.
According to Petschnig, who reviewed the relevant documents released by the government pursuant to the court order, the letter of intent signed in November 2012 “set the price in stone” even before government experts could examine E.ON’s business operations, including agreements concluded with Gazprom.
At the time industry experts warned that the EUR 875 million price was more than twice the EUR 380 million at which the company had been appraised in the previous year, and questioned whether it was even worth that in light of falling world energy prices and an oversupply of gas storage facilities. Concerns of industry critics and opposition politicians focused mainly on the price of the gas storage division, the assumption being that the gas wholesaling unit was profitable.
It wasn’t. An extremely one-sided contract means the actual market value of E.ON’s Hungarian business units may be in the neighborhood of minus EUR 800 million (- HUF 240 billion), leading certain experts to conclude that Hungary may have overpaid for the company by as much as EUR 1.665 billion (HUF 500 billion).
Inexplicably, it did so fully aware that the terms of the contract with Gazprom oblige E.ON’s Hungaria’s gas wholesaler to purchase a predetermined quantity of gas at a set price regardless of world market prices or domestic demand. Specifically, the contract obliges the importer to pay a penalty equal to 50% of the price of any gas it fails to purchase in a given year. The fact that E.ON had not been paying the penalty up front as called for by the contract means an enormous potential liability accrued for which the wholesaler’s balance sheet makes no provision.
Gazprom allowed E.ON to purchase less gas between 2009 and 2012 without penalty providing it bought correspondingly more gas between 2013 and 2015 at prices previously agreed upon. According to Petschnig these prices are some 30 percent higher than current world market gas prices.
MVM and other experts reportedly called this to the government’s attention but to no avail. Petschnig called the failure of the Hungarian government to walk away from the deal “suspicious”.
“E.ON refused to allow the government to investigate the business before signing the letter of intent,” she said. “Even then the value of the company had been appraised at EUR 380 million the year before. The government ended up paying more than twice as much. According to the terms of the letter of intent, the EUR 875 million purchase price cannot be changed. It provides for the government to conduct due diligence but the result does not affect the price. It’s inconceivable!”
Petschnig said negotiations between the government and E.ON began in spring 2011. At that time E.ON asked EUR 1,136 million. Hungarian experts valued it at one quarter this amount. Petschnig said E.ON responded by lowering the asking price to EUR 900 million. Then Minister for National Development Tamás Fellegi told E.ON to renegotiate the Gazprom contract–one in which it determines how much to supply and at what cost– so as to “eliminate all risk”. According to Petschnig, Gazprom insisted on continuing to supply gas at 30 percent over world market prices.
“In this case an importer can do two things,” she said. “Either buy it and take a loss, or not purchase it but pay a penalty of 50% of the price.” This was when “the government should have stepped back from the deal”. And in fact, when it turned out that Gazprom was not willing to renegotiate the terms of the contract, Fellegi ended negotiations. This was the last that was heard of it until August 2012 when Prime Minister Orbán announced out of the blue that his government was about to purchase E.ON’s gas business in Hungary.
Petschnig said the contract even notes that the EUR 875 million (HUF 260 billion) purchase price is only worth it if the wholesaler succeeds in concluding a new agreement with Gazprom. She went on to summarize another passage that stipulates “the Hungarian state has concluded that such political changes have taken place in the domestic and international environment that make it likely that the Hungarian party will be able to conclude a favorable contract with Gazprom”.
Petschnig calls “naive” Fidesz parliamentary delegation head Antal Rogán’s claim in autumn 2012 that if Hungary owned the importer and the gas storage facilities, it would be in a better negotiating position vis-à-vis Gazprom. “E.On buys ten times more gas than Hungary,” Petschnig told ATV. “At one point in time it owned shares in Gazprom. The connections are much stronger.” She further pointed out that Rogán made his comments at a time when Hungarian-Russian relations were very bad. “When Orbán visited (Russian President) Putin in January 2013 they didn’t even hold a joint press conference. Relations froze.”
Petschnig speculates that plans to build two new reactors at the Paks atomic power plant were what rekindled relations with Russia.
Although it is clear to her that certain economic interests close to Fidesz stand to benefit more than others, the difference between the price Hungary paid and its market value is so great that “something else must have been involved, something big”. Petschnig speculates that E.ON may have offered to kick-back part of the purchase price to certain individuals. “Even if the kick-back was only 10 percent, E.ON does well and somebody gets HUF 26 billion (EUR 87.5 million).”
By all accounts Orbán was the only government official in favor of proceeding with the deal. MVM head Imre Mártha reportedly quit in October 2012 in protest over the proposed deal. Even Fellegi’s successor, Minister Zsuzsanna Németh (who previously worked as a lawyer at a company owned by Fidesz oligarch Lajos Simicska), opposed the deal. In the end, MVM’s directors were only willing to approve the purchase if the government financed it through the National Development Bank and indemnified MVM against any losses arising from the deal.
One year after his disastrous summit with Vladimir Putin, Orbán and Németh flew to Russia to sign an agreement awarding the construction of two nuclear reactors at the Paks atomic energy plant (estimated cost: EUR 12 billion) to the Russian atomic energy commission, to be financed in large part with a EUR 10 billion loan from Russia. Hungarians learned of the deal from Russian media outlets. At the time independent experts were at a loss to explain why it was necessary or even desirable for Hungary to award such a contract at this time. Many believe the real purpose of the trip was to negotiate a more favorable contract with Gazprom, and that awarding Russia the EUR 12 billion Paks deal was the price of obtaining favorable terms from Putin.
Unfortunately for Viktor Orbán and Hungarian taxpayers alike, the growing Ukrainian conflict puts Hungary and Russia in opposing camps. The real cost of the Ukrainian conflict to Hungary may not be the value of lost agricultural exports to Russia, but having to write off the amount Hungary overpaid for E.ON’s Hungarian subsidiary.
Recently political alliance Together-PM sued the government over the purchase of E.ON. Together-PM MEP Benedek Jávor has called for the highest levels to be held responsible.
Petschnig points out the absurdity of Hungarian authorities investigating NGOs for allegedly mishandling a few hundred thousand euros of foreign taxpayers’ money when the government of Hungary itself squandered EUR 875 million on the purchase of a company using Hungarian taxpayer money.
Referenced in this article:
http://www.atv.hu/videok/video-20140910-petschnig-maria-zita
