Robert Smyth in Budapest -

The epic struggle between the Hungarian government and the country's oil and gas group Mol in one corner, and the Russian government and Surgutneftegas in the other, may be over, but while Mol got shot of one powerful owner, it has gained another: the Hungarian government, which is using precious International Monetary Fund cash to bankroll the deal.

The Hungarian government announced May 24 that it has agreed to purchase Surgut's 21.2% stake for €1.88bn at HUF22,400 a share using IMF funds, meaning that the purchase will have no immediate direct impact on Hungary's fragile budget deficit situation. However, it is still borrowed money. The government said the price corresponds to the average share price recorded during the last three months prior to the agreement. Once the deal was concluded, the shares were 10% higher than this, it noted.

Nonetheless, some analysts express concern. "Since the Hungarian government has financed the purchase from IMF funds deposited as part of forex reserves in the National Bank, it will reduce the funds available for the country and decrease the cushion for overcoming any imbalances," Attila Vago, an analyst at ConCorde Securities, says. "While the government has gained control of a company that it considers strategically important, in line with its policy of providing energy security and protection against the spike in oil prices, Hungary will need to think about how it is going to start repaying this money or refinancing it at least."

Balint Torok, an analyst at BudaCash, also notes that while this deal will not directly increase the debt of Hungary, it will likely cause political tensions. "Hungary has bought a stake from a loan when very strict austerity measures are in place - this looks quite strange," Torok says.

Even so, he says that the government was forced to find a solution with the main motive of getting Mol back in Hungarian hands. With Surgut holding this stake, Mol always had to keep an eye on the Russian firm regarding potential takeover attempts, while balancing its reliance on Russian partners for supplies of oil and gas. "Relations with Russia should improve, which will help not only Mol, but also other companies like [drugmaker] Richter. I also hope Hungary will get something in exchange for coming up with all that hard cash, such as the possibility to export more products to Russia," he says.

Another aspect of the deal is that the Hungarian government has also become the biggest shareholder in the country's largest lender OTP, with its share increasing from 8.6% to 12%, thanks to Mol being one of the owners of the bank. "The government effectively killed two birds with one stone," concludes Vago.

Unwanted advances

The Mol stake issue had been a running sore between the two countries since Surgut surreptitiously bought the stake from Austria's OMV in March 2009 for €1.4bn. OMV had built up the stake in Mol during an abortive hostile takeover attempt of the Hungarian firm. The Hungarian's were understandably vexed by this; having just warded off one unwanted takeover, it now faced another from an even more dangerous quarter. As such, Surgut, which allegedly has very close links to the Kremlin, was banned from participating in Mol's AGMs due to "transparency issues." Mol also scrapped dividend payments and always referred to Surgut as a financial, rather than strategic investor. Mol always said that it would pursue its "stated independent strategy" and also changed its articles of association to prevent hostile takeovers. "While the fate of Surgut's Mol stake should not have any impact on either Mol's fundamentals or how investors want to sell or buy the stock, it is beneficial for the share price that uncertainties linked to the Russian ownership in Mol ceased to exist," says Vago.

Hopes had been high of a resolution to the ongoing stalemate between the two sides when Hungarian Prime Minister Viktor Orban held talks with his Russian counterpart, Vladimir Putin, in November 2010. The Hungarian government was supposed to have offered Putin the expansion work on Hungary's Paks Nuclear Power Plant and some gas storage units and also a new European stronghold for Russian trade as part of a $4bn investment.

The Russians have come out of this deal smiling, though maybe not laughing, since Surgut, and indeed Russia, has lost a potential new foothold in the EU. "Surgutneftgas has gained 42% on the Mol stake in dollar terms, implying an annual average return of 19%, which looks to be absolutely satisfactory to the Russian company," calculates Vago.

The sale price was some 4% below the last quotation before trading of Mol shares was suspended just prior the announcement. "Investors might read the news in a way that Surgutneftgas did not value the company more and did not believe in its future story," said Radim Kramule, an analyst at Erste Bank. "At the same time, Surgutneftgas had money tied up in this stake and the past months proved that the Hungarian government would not let it do much with its investment, so it may have realised that it might be better to exit and use the money in alternative projects."

The question now for investors is how the deal will impact on Mol's governance.

The state of Mol

After the transaction and together with a 1.2% stake in Mol held by MFB (Hungarian Development Bank), the government will hold 22.4% of Mol. However, if Mol cancels shares of which it has control over via call options on shares currently held by CEZ and ING, as well as those held as treasury shares, the direct influence of state control could jump to over 30%, which would mean the state has to launch a takeover bid - unless it were to change the Capital Market Act. Therefore, this deal with Surgut cuts two ways, as state ownership of a public company is increasing, cautions Vago. "It remains to be seen how government ownership in Mol will work in practice in the long term and how the stakeholders will react to the profound change in Mol's ownership structure," he says.

He adds that under Mol's articles of association, no shareholder can exercise a more than 10% voting right, and so the 10% voting limit also applies to the state. "The risk of increased government ownership in Mol should be taken more circumspectly by investors," he adds.

For his part, BudaCash's Torok doesn't see a big change in how the company will operate. "I don't think it changes the whole picture, since Hungary as a state has a strong impact on Mol as a regulator anyway, so as a shareholder it won't have much more impact than now," he says.

Another scenario brought up by ConCorde's Vago is that if Mol exercises the share options, then Mol and the government could have control over 55% of the company between them, which would make them extremely influential together. From a financing point of view, if Mol pays a handsome dividend to its shareholders in the future, such as 40% of clean net income, ie. excluding special items, then the higher refinancing costs from the IMF loan might be covered, furthers Vago.

Erste's Kramule envisages one of several options: either the stake could be bought by a national agency in charge of the assets from nationalised pensions; or by some other state-owned company purchasing the stake; or Mol buying it in the end, or at least part of it.