Hungary and Croatia continue fighting for leverage in INA talks

By bne IntelliNews November 12, 2013

Tim Gosling in Prague -

Croatia would like to buy out Hungary's MOL Group from local oil and gas firm INA Group, a senior Croatian official said on November 11. However, the claim appears more rhetoric as the Zagreb government seeks to gain leverage in ongoing talks between the two sides over operational control of the company.

Economy Minister Ivan Vrdoljak told state radio that the Croatian government is "interested in principle" in buying Mol's 49.1% in INA, according to Reuters. "We certainly want to get INA back in Croatia's hands as it is our strategic company, but we need to approach that task very seriously given that our public debt surpasses acceptable levels," the minister said, adding that one option may be for Croatia's pension funds to make the acquisition.

Earlier in the day, MOL's shares dropped to a two-year low on the back of a statement released after the end of trading on November 8 that reiterated the Hungarian state-controlled company is ready to sell its INA stake if it can't reach a favourable agreement with Zagreb in ongoing talks.

However, analysts say it's hard to take either side's bluster too seriously, with the fight continuing to spiral around seemingly empty threats.

MOL, 25% owned by the Hungarian state, is now in the habit of threatening to sell the stake, despite a lack of potential suitors ready to pay a decent price, the likely hits on MOL's credit rating and share price, and possible negative political consequences for Budapest. The Croatian government - which holds 44.8% in INA - meanwhile, responds by suggesting it is ready to buy the stake, despite clearly not having the cash to do so.

The crux of the issue is that INA holds strategic assets on the Adriatic coast. That infrastructure has only grown in importance as the EU and Russia tussle over control of oil and gas supplies into Europe.

After building its stake in INA, MOL secured management rights in 2009, despite holding less than 50%. However, former Croatian prime minister Ivo Sanader was given a 10-year prison sentence in November after being found guilty of accepting a €10m bribe from the Hungarian company in return for awarding it that control.

As the two sides geared up for another round of talks, Zagreb stepped up the pressure in early October by issuing an Interpol warrant for MOL CEO Zsolt Hernadi for what it claimed was his involvement in the case. Budapest insists the executive is innocent, and is sheltering him.

Far from a deal

Meanwhile, the talks stutter on. The latest round of discussions ended in early November, with local press reporting a large gulf between the pair. Both look to be playing a risky game, meaning a solution is unlikely to be found soon, "as neither political side is interested in a quick deal," as analysts at Erste Bank put it.

As the drop in MOL's share price suggests, the Croatian assets are an important element for its future performance. Standard & Poor's warned recently that a divestment of the INA stake would increase MOL's exposure to the weak Hungarian economy. "Under these circumstances, we would probably not continue to rate Mol one notch above our 'BB' sovereign long-term rating on Hungary," the ratings agency said.

Zagreb is also penned in. Analysts put the value of MOL's stake around €2bn - too high for Croatia, whose finances are struggling in the teeth of a stubborn recession. On November 11 the government raised its budget deficit forecast for 2013 to 4.3% of GDP, leaving Vrdoljak to admit his government's "bad" financial situation is a stumbling block to buying the INA stake, reported Bloomberg.

Erste points out that with Croatia's public debt/GDP at approximately 60%, "this... payment would add 4%" to that level. While Erste notes that the country's pension funds, with €6.8bn in assets, could be brought into a deal, it reiterates that financing an acquisition "at fair value" remains very tough.

This means that if MOL is pushed into selling the stake, it would have to be to a third party. Yet that would likely suit neither side, as the only potential suitors will likely be from Russia. "A Russian company would pursue only its own interests," Croatian daily Jutarnji List pointed out in October, and those are in direct conflict with Croatia's strategic interests.

Both Gazprom and Rosneft have denied any interest. Yet if they were to start talks, they would drive a hard bargain, leaving MOL struggling to secure a decent price. Such a sale would also likely be heavily scrutinised by the EU.

Such scenarios are proving enough to keep both sides at the negotiating table - thus the very public tussle to gain extra leverage. MOL told Reuters on November 11 that it still hopes for an agreement "through which we can increase the value of INA".

Croatia's economy minister said the government wants to continue talks over the management rights regardless of decisions on ownership. "If we manage to resolve that issue by the end of this year, all other issues will be much easier to deal with. It is in nobody's interest for the talks to drag on until mid-2014," Vrdoljak claimed.

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