UPDATE 2-Czech ministers propose floating 7 pct of CEZ

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By Marek Petrus

PRAGUE, March 14 (Reuters) - Czech economic ministers have agreed to propose floating a 7 percent stake in state-owned power utility CEZ , worth $1.7 billion at current market prices, the Finance Ministry said on Wednesday.

The state holds 68 percent of CEZ, the country's most profitable company and central Europe's biggest electricity producer and distributor.

The cash-strapped government has spoken for months about selling CEZ shares to find 31 billion crowns ($1.45 billion) to pay for road construction without inflating an already bloated budget deficit.

Finance Ministry spokesman Ondrej Jakob confirmed an earlier newspaper report the ministers, who do not publish the outcome of their meetings, had decided to propose the stake flotation to the cabinet in the coming weeks.

"Either we could acknowledge the true budget deficit ... or gain a one-off revenue from the sale of a state asset -- the CEZ stake. We opted for the latter," Finance Minister Miroslav Kalousek was quoted by the daily Hospodarske Noviny as saying.

CEZ shares fell as much as 5 percent when the market opened before trading 3.3 percent lower at 838 crowns by 0840 GMT. Their drop outpaced a 2.6 percent slide in the blue-chip Prague bourse index PX amid a global sell-off.

"The state budget needs money in the third quarter and a sale via the stock exchange is the quickest way," said Tibor Bokor, analyst at Wood & Company.

"We expect CEZ to be the buyer of the stake on the market, thus supporting the share price. We expect the fair value of remaining shares to be increased by 7-10 percent if CEZ cancels the purchased shares."

In response to the government plan and investor concerns it is overcapitalised, cash-rich CEZ has said it was considering a share buyback of up to 10 percent of its stock on the open market to invest excess cash and revamp its capital structure.

Analysts were not concerned about the prospect of a large number of shares flooding the market and driving the share price down.

"Due to the fact that CEZ is willing to buy back its shares we don't expect overhang of the supply on the market," said Robert Keller, analyst at Patria Finance.

Transport Minister Ales Rebicek was quoted by the daily Hospodarske Noviny as saying the government needed to receive the proceeds from the CEZ stake sale in the third quarter at the latest to avoid disrupting road construction.

The plan has yet to receive final approval from the Cabinet.

This year's state budget was approved with a deficit of 91.3 billion crowns or 2.6 percent of gross domestic product on condition the government will raise revenue from privatisation to avoid boosting expenditure to pay for road construction.

The company has a market capitalisation of $24 billion and is the most valuable Czech asset still awaiting privatisation.

CEZ said a shareholders' meeting in April would have to approve the plan to buy back the firms' own shares, although that is seen as a formality given the state's majority holding.