Dominic Swire in Prague -

The courtship dance between Austria's OMV and Hungarian oil and gas firm MOL is turning out to be more like a never-ending game of chess than the overture to a merger that many investors had been anticipating – and perhaps praying for. But even if this marriage, forced or otherwise, fails to take place, there are other suitors eyeing these companies, including the omnipresent Gazprom.

The Hungarian government's decision Thursday, June 28 to leap to the defence of its national energy company throws any merger with OMV into doubt and means another headache for the European Commission, which over the past few years has been battling EU member states over their refusal to relinquish their fondness for fostering national champions.

Prime Minister Ferenc Gyurcsany said Wednesday that he opposed any strategic investor taking control of MOL, in which the government has no stake, and would "use all means available to halt this hostile takeover attempt," including perhaps legislation.

The potential for a hostile takeover follows MOL's rejection of OMV’s approach, which began when OMV announced Monday they had increased their stake in MOL from 10% to 18.6% and explicitly stated a desire to join forces with the Hungarian firm.

In a statement to announce its increased stake in MOL, which cost around €1bn, the Austrian firm left no doubt about its intentions. "OMV seeks to strengthen its strategic participation in MOL through this operation. The company is convinced by the long-term benefits of a closer cooperation, which will allow two European companies to considerably increase the security of supply, a significant benefit for Europe. Furthermore the complementary strengths of both companies in Central Europe could be capitalized."

MOL rejected OMV's approach out of hand, saying that while it "is happy to see that a market competitor sees MOL shares as an attractive investment opportunity, it would like to clarify that it has an unchanged intention to follow its own proven strategy.”

Divide they fall

That strategy encompasses not being taken over by a company with dominant or strong shareholdings of foreign governments, whether it be OMV, which is 31.5% owned by the Austrian government, or Poland's PKN Orlen.

"MOL's response appears to have ruled out the possibility of a friendly merger or co-operation deal, although a hostile takeover by OMV remains a possibility," says Matthew Hall from the consultancy Global Insight.

Hall says OMV's best chance of achieving this is to launch a public takeover and attempt to obtain a majority stake in the group. However, due to a Hungarian law, voting rights of single shareholder groups are capped at 10%. This would mean OMV would need a stake of at least 50%, which could be difficult to achieve given that MOL management already owns 25%.

It would also be expensive given the recent surge in the share price. On Wednesday, MOL bought a further 5m of its own treasury shares, effectively confirming the company’s strategy of fending off OMV’s approach, rather than capital structure optimization as the company had initially suggested last week when it announced a share buyback programme that will see them lend 8.76m shares to get around rules preventing treasury holdings of more than 10%.

As a result, MOL's share price rose through the roof, though it levelled off Wednesday as the likelihood of a friendly merger dissipated. The shares closed Wednesday at HUF28,500 (€115) after hitting a record high of HUF30,050 the previous day.

However, even if MOL manages to fight off OMV's approach, the two firms remain vulnerable to bids from larger rivals – even those with large government shareholdings.

In its statement, OMV says the main reason behind their desire to merge with MOL is that together they will stand a better chance of fending off further takeovers in what they say is the inevitable further consolidation of the industry. Many analysts see the threat of a takeover coming from Russia, in particular Lukoil or Russian state-controlled Gazprom. Some say it is the possibility of a Russian company taking control of MOL that is behind OMV’s desired merger.

"A Russian-owned MOL could be a much stronger and more aggressive competitor who may attack OMV’s markets. In addition, it would make the contact more difficult between OMV Austria and its Romanian interests. These facts could make OMV reasonable to buy MOL shares until any hostile takeover could be excluded," says Akos Herczenik, an analyst with Raiffeisen.

The Austrian weekly magazine News reported on Thursday, citing industry insiders, that Gazprom is eying a stake in OMV. Austrian Finance Minister Wilhelm Molterer was quoted as saying that selling the state's stake was possible in theory. "If management comes up to us and if it would be favourable for OMV's strategy we might consider such a step," Molterer was quoted as saying. "But this is currently not on the agenda and also not foreseen in our coalition agreement."

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