UPDATE 3-Czech ministers propose floating 7 pct of CEZ

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By Marek Petrus

PRAGUE, March 14 (Reuters) - Czech economic ministers will propose floating a 7 percent stake in state-owned power utility CEZ , worth $1.6 billion at current market prices, the Finance Ministry said on Wednesday.

The state holds 68 percent of CEZ, and government officials say there is no plan to give up majority control of the country's most profitable company and central Europe's biggest electricity producer and distributor in the near future.

The cash-strapped government has spoken for months about cutting its CEZ stake 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Finance Ministry spokesman Ondrej Jakob confirmed an earlier newspaper report that the ministers, who do not publish minutes of their meetings, had decided to propose the stake flotation to the cabinet in the coming weeks.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 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 regaining ground to trade 3.5 percent lower at 836 crowns by 1050 GMT, while the blue-chip Prague bourse index PX was down 2.6 percent amid a global share 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.

But analysts were not concerned about the prospect of the state's stake flotation driving the share price down, as the company is expected to announce a simultaneous buyback of a corresponding number of its own shares on the open market.

NO OVERHANG FEARS

Transport Minister Ales Rebicek was quoted by the 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.

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.

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

Bokor said the fair value of remaining shares would increase by 7-10 percent if CEZ cancels the purchased shares.

The company said it would work out the details of any share buyback once the flotation receives Cabinet approval.

"It depends on the government decision, and only after it has been taken will we be deciding on the share buyback," said CEZ spokesman Ladislav Kriz.

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 raised revenue from privatisation to help pay for road construction.

The company has a market capitalisation of $24 billion and is the most valuable Czech asset still not privatised.

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