Czech National Bank Blocks Equity Acquisition by China’s CEFC of J&T Finance Group Amid Concerns about Funding Sources and Opaque Ownership Structure

On January 3, 2018, reports in the Czech media revealed that in, November 2017, the Czech National Bank (CNB) rejected an attempt by China’s CEFC Energy to raise its equity stake in Czech-based J&T Finance Group to 50%.  In May 2015, CEFC acquired a minority 5% stake in the Czech lender, and just months later, increased its equity ownership to 9.9%, for an undisclosed sum.

CEFC’s renewed attempt to substantially bolster its equity position in the company was blocked by CNB, reportedly due to “inadequate” clarity concerning the origins of CEFC’s funding (the acquisition involved an estimated $879.2 million) and the lack of transparency regarding the Chinese conglomerate’s elusive ownership structure.

Reports indicate that CEFC had previously been concerned about its colorful corporate reputation harming its prospects for CNB approval, hiring a local firm to quash media reporting on the company serving, among other allegations, as a “propaganda platform” for the Chinese political-military establishment.  For example, a recent Reuters article made the point that the company, “…has layers of Communist Party committees across its subsidiaries – more than at many private Chinese companies.”

Despite the negative ruling, CEFC has indicated that it will continue to “cooperate” with CNB.  It is speculated that the company could continue seeking the requisite approvals to conclude this deal at some point in the future.

In stark contrast to CNB’s rejection of the transaction, the European Central Bank (ECB) had previously issued a decision in September 2017 approving the deal.  Although the ECB reportedly required secondary approvals from national regulators of the countries in which J&T Finance operates (i.e., Slovenia, Croatia, Russia, the Czech Republic, and Barbados), sources indicate that the ECB finalized its favorable decision prior to receiving an official approval from Prague, spotlighting a discrepancy between the foreign investment review process at the EU-level versus the national level.

The public revelation of CNB’s decision contributes to a growing list of market and regulatory concerns with respect to allegations of CEFC ‘s corruption, non-transparency and political influence-peddling.  Specifically, in November 2017, the United States Justice Department arrested, Patrick Ho, on a series of criminal charges pertaining to bribing senior officials in Africa.  Seemingly unfazed, CEFC has continued to aggressively pursue interests in the Czech economy and society and those of neighboring states.

The most recent example is CEFC’s pending $2 billion acquisition – from American firm Time Warner – of a potentially controlling stake in Central European Media Enterprises (CME), a broadcasting conglomerate with major media assets in six smaller NATO member states in the region.  As CEFC, in partnership with the Czech-Slovak private equity firm, Penta Investments, is reportedly now the sole bidder for these strategic broadcast assets, the deal may be concluded soon — without the same regulatory hurdles that have dogged the J&T Finance transaction.  Ironically, a constitutionally-independent body like CNB has more authority and latitude to adjudicate and screen proposed foreign acquisitions in the financial sector.

At this point, it remains to be seen how CEFC’s appeal of this adverse CNB decision will unfold, particularly given the company’s close ties to Czech President Milos Zeman (e.g., its Chairman serves an official advisor to his office).