Tim Gosling in Prague -

Two Czech financial groups are reportedly clubbing together to buy Unipetrol, the country's leading oil refiner and petrochemical company, from Polish state-owned oil group PKN Orlen. While a deal looks unlikely - at least in the short term - it could kick off a merry-go-round of M&A across the closely-linked Central European region should it eventually go through.

Czech energy holding EPH and financial group PPF - owned by Peter Kellner, Central Europe's richest man - have bid around CZK30bn (€1.11bn), Czech daily Hodsparske Noviny reported, citing several unnamed sources, although it is not clear whether that is the price offered for the whole company or just the 63% held by PKN. 

Unipetrol operates the country's largest network of petrol stations under the Benzina brand, as well as refineries in Litvinov and Kralupy. The offer revives a bevy of questions regarding the economic and political role of the Czech Republic's only major refiner.

Both the reported buyers and target companies refused to comment on the report. Unipetrol Chairman Mark Switajewski claimed that he knew nothing of any offer. However, PKN Orlen has reportedly hired an investment banker and will take until the end of summer to consider the deal.

"If the CZK30bn bid stands for a 100% stake in the company, it would be approximately 8.5% below yesterday's closing price (CZK165 per share vs the current market price at CZK181 per share)," note analysts at Erste. "We will watch the issue."

No haste

The Polish company is unlikely to be in a great rush to sell. On the one hand, the fortunes of the mid-stream assets are just turning up after years of struggle; on the other, the time is not right politically.

European refineries have been the weak link in the energy chain in recent years, as high oil prices and overcapacity have colluded to turn them into a financial drain on owners. PKN has been struggling for some years against the Czech government's demands to invest in upgrading Litvinov and Kralupy, with the company complaining that margins at the facilities make putting in capital unfeasible. At the same time, the Polish company has fought suggestions from Prague that it would like to buy at least one of refineries back. 

However, with the collapse of crude prices last year, the mid-stream segment has suddenly become a strong earner. PKN has recorded its strongest refining margins in years this year at group level. Unipetrol has been doing its bit. In the second quarter of 2015 it earned a record net profit of CZK3.3bn. While that level of performance is not expected to last forever, it has led the share prices of both parent and subsidiary to boom.

Refined politics

Yet, the Czech refineries are anything but a straightforward economic asset. The foreign ownership of Unipetrol has long been a touchy subject for Czech governments. The installations are also seen as an important element in the Czech Republic's energy security. 

The Czech refineries are seen as a strategic asset in Prague because of the role they play in the the country's bid to maintain alternative crude oil supplies to those arriving from Russia. With Russian oil majors said to be using the country as a test case for raising prices, a severe cut in deliveries via the mainline Druzba pipeline  in 2012 highlighted its vulnerability. 

That cut led Ceska Rafinerska, the Unipetrol subsidiary that operates the refineries, to shut Kralupy. It also forced Prague into action, with the state buying a stake in the TAL pipeline that runs oil from Azerbaijan, Kazakhstan and Iran via Italy's port of Trieste. Demand from the two refineries is vital to keep the Czech capacity orders through the route. 

At the same time Andrej Babis – the powerful finance minister and owner of agrochemicals group Agrofert – has long had his eye on Unipetrol and has little love for the Polish owner. The billionaire - tipped as a future prime minister -  is still reported to be smarting from having lost several legal cases he brought against PKN over its refusal over a decade ago to sell Unipetrol's petrochemical assets to Agrofert. Babis claims he had a prior agreement with PKN to buy the assets after the privatisation of Unipetrol.

Meanwhile, politics also plays a role in Poland. With the country's giant state companies a powerful lobby and also seen as a sign of national strength, the government - already under huge pressure to catch the populist opposition in the polls - is unlikely to sell, at least ahead of elections in October, notes HN.

Merry-go-round

However, PKN has not dismissed the offer out of hand. With investment demands at Ceske Rafinerska still understood to be high, and no guarantee that the oil price will remain on the floor, it may well have reason to look at doing a deal later in the year. 

Should that happen, it has the potential to kick off a regional merry-go-round of sorts, as companies across Central Europe take stock of the geopolitical picture and opportunities thrown up by the EU's Energy Union and the push for supply diversification. 

The suitors, or EPH at least, are likely to maintain their interest. The Czech energy holding has long suggested it would like to buy Unipetrol. Unconfirmed reports say it made an offer in February, but was unceremoniously rebuffed in Warsaw because of the price. 

Meanwhile, the offer brings EPH back together with PPF following a brief hiatus. Owner Peter Kellner sold his 49% stake in the energy holding to Slovak financial group J&T and rising entrepreneur Daniel Kretinsky last year to help fund the acquisition of the country's largest telecom operator O2 CR. 

EPH has continued an apparently ravenous buying spree. In particular it has been buying assets in Western Europe - Italy and the UK - in an apparent bet that the EU will pay for older coal-fired power plants to remain ready to offer capacity to markets. 

However, that acquisitions drive is thought to have left EPH less than cash rich. The offer for Unipetrol could cast further doubt over the Czech-based group's participation in the sale of Slovakia's dominant power producer Slovenske Elektrarne, although sources told bne IntelliNews recently that the company, in which Enel is trying to offload a 66% stake, is essentially worthless, and that EPH "could afford it".

PPF is understood to be in a similar position, with the holding having squeezed a loan out of O2 CR itself to fund the purchase. Kellner's numerous Russian assets are also thought to be draining capital for the meantime.  

For its part, PKN could be tempted at some point to cash in to power other acquisitions and investment. The company was reportedly in talks over a potential purchase of a stake in Croatia's INA, which has been at the centre of a tug of war between Zagreb and Hungary's Mol for some time. 

That would offer it access to promising upstream assets, as well as refining capacity right next door to Adriatic crude terminals. Mol, in turn, has put in a joint bid with Hungarian state holding for Slovenske Elektrarne.

Like its state-controlled peers, the Polish company is also under persistent pressure from Warsaw to invest in other "strategic" projects. It is currently reported to be in discussion with the government over getting involved in the fund to drive the country's rescue of its coal mines. It is also busy in the hunt for shale gas, an effort now ditched by all major foreign investors.