Hungary's fight with Croatia over INA steps closer to messy endgame

By bne IntelliNews March 3, 2014

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The battle between Hungary's MOL and Zagreb over the ownership and management of Croatian national oil and gas company INA appears to be approaching what could be a messy endgame.

On February 28, INA announced that MOL has made a technical request connected to a sale of its stake, which followed a ruling by Zagreb that INA must hand over part of its wholesale gas business to state-owned HEP.

INA announced in a statement to the Zagreb Stock Exchange that it has received a request from MOL seeking cooperation in setting up a data room. The move suggests MOL is now gearing up to offer potential suitors its 49.1% stake in the company.

"INA received today a request from MOL requesting cooperation from the company's management in organising a data room as part of the standard due diligence procedure to be conducted by a third party in connection with preparations for a possible sale of its stake in INA by appointed advisors," the statement read.

The Croatian government, which holds a 44.84% stake in INA, has been at odds with MOL - which is controlled by the Hungarian state - for much of the time since the Hungarian company was granted management rights in 2009. Negotiations have been especially fraught in recent months, and with little apparent prospect of a settlement in sight, both sides suggested they will look to sell.

Russian energy giants Rosneft and Gazprom are thought to be the only likely suitors, and given the troubles that MOL has experienced they would likely insist on buying a majority stake in order to guarantee management control. That would require a stake purchase from both sides. Local media reported in mid-February that talks between Croatia and Russia would take place following the end of the Sochi Winter Olympics, which wrapped up on February 23.

The INA statement also said that the company is not aware of any new facts or circumstances that could have an impact on the price of INA shares. By that time, Zagreb had already announced its decision that INA must hand over a portion of its wholesale gas business to HEP.

As INA revealed in a statement, the Croatian ministry of economy issued a package of resolutions on February 27 that will require INA to sell a portion of its domestic gas production to HEP for household distribution. Previously, INA - via its Prirodni Plin unit - sold gas at HRK2.2 per cubic metro (cm) to household suppliers. It will now be required under regulated pricing to sell to HEP at HRK1.7058. The announcement saw the ZSE put INA shares in observation mode.

The move will effectively see INA transfer HRK250m-350m (€33m-46m) of its annual revenues to the state-owned HEP, the statement complained. These decisions will have a material negative impact on 2014 and future years' business performance and on funds available for investment projects, INA concluded.

"What we see here is something similar to Hungary's government-mandated energy tariff reductions, and the bill is to be footed by MOL," note analysts at "In fact, there is little reason to wonder how it came to this, in view of the stressed relations between the fuels group and Zagreb over MOL's management rights."

The move is likely to hit the Hungarian group hard, although given that Prirodni Plin had long operated at a loss anyway, there is also a step towards a silver lining. "In our rough estimation, this decision has an adverse effect per se on the valuation of a MOL share of some HUF500," suggests Tamas Pletser of Erste Bank. However, one of the poison pills in the relationship between MOL and Croatia has been removed by the takeover of Prirodni Plin from MOL, even though MOL is not fully happy with the decision."

The move suggests a couple of scenarios, claims "Croatia may not be actively considering the sale of INA and it wants to put pressure on MOL this way, making the Hungarian group's operation in Croatia even more bothersome than it already is. If, however, Zagreb is actively gearing up for the sale of INA, the current measure may seem like coercion on MOL to accept a bid of around $2bn or less."

Most analysts are convinced that MOL is now almost certain to try to offload its stake, however. "MOL is preparing the sale of its INA stake, which is the only possible exit from the troubled situation in the country," Pletser writes. The effective lowering of the price on INA's regulated business will clearly impact the potential value of any deal.

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