BROWN COAL A Tough Sell for Vattenfall

A Mongolian company has launched legal action against Vattenfall, after the Swedish energy giant refused to allow it to bid for a brown coal operation in Germany.
Brown coal extraction in Lausitz.

Magnus Hall can't afford to be picky. The head of Sweden's Vattenfall hasn't received many offers for the energy company's brown coal division in eastern Germany. With Berlin pushing the country toward renewable energies, the mining operation in the Lausitz region isn't exactly an attractive investment.

One man's trash, however, is another man's treasure. Vattenfall did receive one particularly generous offer, according to correspondence obtained by Handelsblatt. LMMG, a project company based in Dresden, was prepared to pay the Swedes €1.85 billion ($2 billion). By comparison, the German electricity provider Steag made an offer in the three-figure million range.

But there was a problem with LMMG's offer. When the unofficial bids were submitted on December 21, the company had already been disqualified from the process by Vattenfall and its investment bank, Citigroup.

LMMG is short for Lausitz Mongolia Mining Generation AG. It is headquartered in Dresden but is backed by Mongolian investors. On its website, it states its mission as buying and managing "strategic power generation companies in Germany and in Mongolia."

Horst Schmidt, the head of LMMG, told Handelsblatt said the company should have been allowed to bid for Vattenfall's business.

"I cannot understand why we were excluded from the bidding process,"  he said. "To this day it hasn't been justified."

I am convinced that taking over Vattenfall's brown coal division makes economic sense for us. The power plants will be lucrative for some time. Horst Schmidt, head of LMMG

LMMG submitted a complaint to the European Commission alleging discrimination and a lack of transparency. The complaint, obtained by Handelsblatt, personally singles out the head of Vattenfall, Mr. Hall, as well as his representative in Germany, Tuomo Hatakka, and the Kingdom of Sweden, which owns the energy company.

There's been speculation that LMMG was excluded for political reasons. The Swedes perhaps didn't see an advantage in doing business with a company backed by investors in an isolated Asian nation.

At first glance, it might seem curious that the Mongolians are interested in German brown coal. Mongolia is among the 10 most resource-rich nations in the world, but it needs expertise to develop those resources. By purchasing Vattenfall's eastern German coal operation, the Mongolians hope to acquire knowledge about how to build modern mines.

LMMG received an e-mail from Citigroup informing the company that it didn't meet the criteria for the bidding process. But the criteria weren't listed in the e-mail.

"We have the necessary financial power and know-how," said Mr. Schmidt, who has worked for 35 years in eastern Germany's brown coal industry. He was the managing director of the Central German Brown Coal Association among other positions.

 

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A spokesman for Vattenfall declined to comment on the case, citing the confidentiality of the bidding process. He simply said the process wasn't discriminatory and was conducted by experienced investment bankers and legal experts.

Vattenfall does have to respect the sensitivities of German trade unions and public authorities. The Industrial Trade Union for Mining, Chemicals and Energy is pressuring the Swedes to find a buyer that will protect the interests of the coal operation's 7,000 employees.

The German federal government and the states of Brandenburg and Saxony, for their part, want a buyer that will phase out the coal operation in an orderly fashion over the coming decades.

Though Germany is moving toward renewables, LMMG's Mr. Schmidt believes Germans will continue to get electricity from brown coal for some time to come.

"I am convinced that taking over Vattenfall's brown coal division makes economic sense for us," Mr. Schmidt said. "The power plants will be lucrative for some time."

Before going through with a deal to purchase the Vattenfall operation, LMMG would need to know how long German authorities will allow brown coal mining in Lausitz to continue, Mr. Schmidt said. He's not alone with that demand. The three bidders have called for the same.

The German electricity provider Steag and two Czech energy companies, CEZ and EPH, made it into the next round of the bidding process. They have until March to submit binding offers.

Whoever wins the bid will own five mines in Lausitz, Germany's second-largest coal region after the Rhineland. Four coal plants and 10 waterworks are also part of the deal. The operation remains profitable, having brought in €647 million before interest, tax and write-offs last year.

Mr. Schmidt with LMMG remains determined to participate in the bidding process and is banking on the political support of the Mongolian government.

"The Mongolian embassy in Sweden will contact the Swedish foreign ministry," Mr. Schmidt said.

 

Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy.  Sönke Iwersen leads Handelsblatt team of investigative reporters. To contact the authors: [email protected] and [email protected]