Collapsing Deals Show Long Road to Market Trust for Euro Hopeful

(Bloomberg) -- Bulgaria didn’t make any friends on the market this week.

The anti-monopoly office on Thursday scuppered transactions involving two of eastern Europe’s most influential companies, utility CEZ AS and investment holding PPF Group NV. The same day, China’s HNA Group Co. dropped talks to run the airport in Bulgaria’s second-largest city. The collapsed deals highlight how a volatile business environment risks hurting economic development in the European Union’s poorest country, where the government has vowed to improve transparency and tackle graft as it seeks to adopt the euro.

“Bulgarian regulators are often politically engaged, which affects the business environment negatively,” Evgeni Kanev, a managing partner at deals consultancy Maconis LLC in the capital Sofia, said by phone. “In one case, the decision might be positive. In another, a serious investor was stopped, which will have a negative impact on future private deals.”

In another sign of uncertainty in the Balkan country’s business landscape, HNA on Thursday said that it gave up on a concession tender it won in March together with a Bulgarian company to manage the Plovdiv airport because it couldn’t meet procedure deadlines.

“We were unable to reach a final agreement that was fair and equitable to all parties,” a spokesperson for the company said.

Corruption Index

Euro-area ministers urged Bulgaria last week to step up judicial reform to ensure stability and integrity of its financial system as a part of the country’s application to adopt the bloc’s common currency. The country ranked 71st in Transparency International’s corruption perception index for 2017, below non-EU member Belarus and on par with South Africa and Vanuatu. Foreign direct investment last year fell 12 percent to 950 million euros ($1.1 billion) as corruption and red tape discourage foreign investors.

Even so, that contrasts with Bulgaria’s strengths on the financial front. Its public-debt burden is the third-lowest in the EU and it has investment-grade credit ratings above wealthier Balkan peers Romania and Croatia. A currency pegged to the euro has removed the risk of exchange-rate swings.

Market Dominance

On Thursday, plans by CEZ, the largest traded power company in ex-communist Europe to sell its local unit after years of disputes with the government were blocked, calling into question the prospects of its planned exit from the Bulgarian market. PPF, a Czech holding company, lost its pitch to buy Bulgaria’s biggest media group from Sweden’s Modern Times Group MTG AB.

The anti-monopoly office said both transactions would give the new owners dominant market position, which could hurt competition. The decision raised eyebrows among analysts as Inercom, the prospective buyer of CEZ assets, is a new company whose six solar plants generate about 2 percent of Bulgaria’s solar power. PPF currently has no media assets in the country.

The government’s “stubbornness to stop the deal for CEZ’s Bulgarian assets managed to produce one of the most amazing and incompetent decisions of the Commission for Protection of Competition,” Kaloyan Staykov, an energy analyst at the Institute for Market Economics in Sofia, said in an emailed note. “If the same logic is applied, no company could
buy CEZ’s assets.”

Stock Effect

MTG shares rose 2.3 percent in Stockholm on Friday after falling 5.5 percent Thursday to an eight-month low. CEZ shares weren’t affected in Prague because the company has had another potential buyer lined up for its Bulgarian business. CEZ’s Bulgarian power distribution unit, listed in Sofia, fell 10 percent on Thursday close to a one-year low.

The government earlier expressed concern that Inercom lacked the capacity to manage the assets. CEZ’s Bulgarian units provide electricity to about 40 percent of the consumers, including those in the capital Sofia.

Both Modern Times, or MTG, and Inercom said the rulings were “surprising,” while CEZ and PPF said they’ll study them further.

Amsterdam-based PPF, owned by the Czech Republic’s wealthiest man, Petr Kellner, made the deal with MTG a month before it announced it’s buying a package of east European telecommunications assets from Telenor ASA, including a unit in Bulgaria. The agreement to take over Telenor Bulgaria and other assets in Hungary and the Balkans is subject to European Commission approval and not Bulgaria.

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