Michael Logan in Budapest -

The saga of Austrian energy firm OMV's attempts to merge with Hungarian peer Mol looks set to drag on after the European Commission this week launched an investigation into Hungary's legislation aimed at blocking foreign takeovers.

Hungary's parliament on Monday, October 8 overwhelmingly passed the bill - dubbed "Lex Mol" - as OMV's advances prompted the normally fractious political parties to unite. There is real fear in Hungary that the now-private Mol could end up renationalised, only this time the owner would not be Hungary but its former imperial master Austria through the 31.5% stake that Vienna holds in OMV.

The new law allows "strategic" companies to take defensive measures following a takeover attempt and forces bids to be approved by the target company's highest body. It is these and other points of the law that have vexed the EU. Internal Market Commissioner Charlie McCreevy earlier warned Hungary he would frown upon attempts to prevent foreign companies from "taking an interest in Mol". After Hungary passed the law anyway, Oliver Drewes, McCreevy's spokesman, said that a review had been launched.

The dispute complicates a saga that began in June when OMV upped its Mol stake to 18.6% and asked for "increased cooperation". OMV prompted further outraged splutters from Mol by conducting a public campaign to promote the merger. You could almost see steam coming out of Mol CEO Zsolt Hernadi's ears when, in September, OMV increased its stake to 20.2% and offered HUF32,000 (€128) per share - valuing Mol at around €14bn.

Given OMV's determination, it's little surprise that the new law has left it unfazed. "We are under no time pressure," OMV spokesman Thomas Huemer told bne. "We still intend to combine with Mol."

The Austrian firm may find its patience tested to the full. Despite Energy Commissioner Andris Piebalgs saying that the EU could act "very quickly" in the case, most analysts expect the legal process to drag on for years.

Obstacles to progress

Even putting aside the law, OMV faces obstacles - chiefly a 10% limit on the direct voting influence one party can have in Mol and the indirect influence of over 40% the Mol board controls through shares lent to friendly banks. OMV's offer was conditional on the removal of the 10% limit, but the required 75% of votes seems unattainable.

OMV's merger rationale is simple: it wants to combine Central and Eastern Europe's two biggest energy companies, with a combined market capitalisation of $24.1bn, to create a regional powerhouse equipped to defend against external players - most likely major Russian firms such as Gazprom and Lukoil, although OMV is careful not to say this. "The oil and gas industry will face changes in the coming years," says Huemer. "We are leading the field, but the world will not stand still."

Mol isn't buying the argument, and says it is committed to growing organically through regional acquisitions in Italy and Croatia and partnerships with companies such as Czech power utility CEZ. "Mol believes that a merger of a privatised, liberalised Mol with state-controlled, vertically integrated OMV is not in the best interests...of the region's energy consumers," Szabolcs Ferencz, Mol's corporate communications manager, told bne.

Ferencz insists Mol is acting in the interests of its shareholders, saying that OMV's offer is too low and represents a serious completion risk. However, rumours abound that independent shareholders want to force an EGM on the issue. Several have publicly supported a merger. Mark Mobius, executive chairman of Templeton Asset Management, which owns shares in both OMV and Mol, said that a merger would make sense and allow the new entity to fend off the Russians.

Another issue is the differing views of the divestments anti-trust authorities would require in the event of a merger. OMV says it will only have to sell some filling stations, but Mol feels differently.

"It would pre-emptive to discuss divestments, but a combination of the two businesses would lead to substantial competition issues, forcing significant divestments," Ferencz says.

These assets, such as refineries in Hungary and Slovakia, would then be prime targets for Russian companies.

Other players in the market, however, suspect Mol is exaggerating. "If OMV and Mol were to merge...I doubt they will divest any of their major refining capacity," a senior figure in the regional oil industry, who wished to remain anonymous, told bne.

According to the official, a drawn-out battle could cause the real problems. "Now the Hungarians have clamped down, it will be very difficult if not impossible for OMV to takeover Mol," he says. "In the meantime, other players may...move to strike by acquiring other assets in the region or by going for Mol or OMV."

Huemer says that OMV was not worried about becoming a target, but hinted that Mol could open the door to the Russians. "We have a strong growth strategy and Mol is additional to that," he says. "They said they would rather join up with Gazprom and Lukoil than us."

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