OMV prepares for long battle to win Hungary's Mol

By bne IntelliNews October 11, 2007

Derek Brower in Vienna -

Correction and clarification:

In our story "OMV prepares for long battle to win Hungary's Mol" (2007-10-11), we stated that Wolfgang Ruttenstorfer, OMV's chief executive, said the company would be willing to divest a refinery to meet conditions on a merger laid down by the European Commission. OMV asked us to point out that Mr Ruttenstorfer said the company would be prepared to give access to "refinery capacity," but not to divest a refinery. OMV also wish to point out that Mr Ruttenstorfer does not consider the bid for Mol to be hostile, but that the company has "communicated a declaration of intent to submit an offer if certain impediments are removed". Our article described OMV's unsolicited bid for Mol as "hostile". We did not mean to imply that Mr Ruttenstorfer also believes that the bid is hostile. Business New Europe and the author of the article, Derek Brower, apologise for any confusion. A corrected version of the story follows:

Wolfgang Ruttenstorfer, chief executive of Austria's OMV, told bne in Vienna on Tuesday, October 9 that the company would do "whatever it takes" and spend "however long necessary" to win control of Hungary's Mol, amid a worsening of relations between the two Central European rivals.

The two companies have been in a stand-off since the end of June, when OMV increased its stake in Mol from 10% to 18.6% and called for a "friendly merger." Mol's board unanimously rejected the offer. Ruttenstorfer said that Mol's refusal to negotiate forced OMV to go public with a hostile bid at the end of September. The Austrian firm has offered HUF32,000 (€127.70) per share for the outstanding stake in the company, valuing it at €16bn. It recently increased its holding to 20.2%.

And this week, Mol's executive chairman, Zsolt Hernádi, ratcheted up the tension between the two companies further by raising the spectre of energy nationalism. He claimed that a successful takeover by OMV, in which the Austrian state holds 31%, would scare other countries in the region away from privatisations - if they think the outcome will be a foreign government buying partial control of key assets. The company's chief executive, György Mosonyi, has also claimed the merger would reduce efficiency and competition in central Europe.

To the barricades!

Mol has prepared defences against the merger by buying its own shares, with the company now thought to control over 36%. It has also retained Morgan Stanley to fight its corner. Mol has circumvented laws that prevent a listed company from owning over 10% of its own shares by loaning them out to banks closely linked with the firm. Ironically, the removal of those management share rules is one of the conditions of OMV's offer. There are also rumours that Mol has approached Russia's Lukoil to act as a white knight against OMV's approach.

Despite Mol's defensive manoeuvring, OMV remains confident that the merger will go ahead - though Ruttenstorfer warned investors that the deal could take "two to three years." He also claimed that Mol's investors are warming to the merger, saying that he has "not spoken to one fund that has said it doesn't make sense." Given the control Mol and OMV now hold over the Hungarian firm - around 60% - two large institutional investors, Templeton and Centaurus, could swing the balance. And Ruttenstorfer intimated his company would be prepared to raise its offer for Mol, saying that the funds had told him an increase to HUF34,000 could be irresistible.

He also told bne that the takeover attempt was effectively part of OMV's defensive strategy in the region. "We didn't want to wake up one day and find that someone else owned Mol," he said. "Consolidation in the region would continue," and OMV should act now to secure Mol.

While Ruttenstorfer insisted that OMV's growth strategy would not depend on the merger going through, but would rely on "organic growth," a strategy presentation to journalists in Vienna told a different story. Adding Mol to the portfolio would nearly double OMV's oil production to 427,000 barrels a day. Refining capacity would also grow substantially, from around 26.4m tonnes a year (t/y) to over 43m t/y. Gaining that capacity would hit the company's targets for growth by 2010.

However, much could depend on the role of the European Commission, admitted Ruttenstorfer. "They will do their work and if it means we have to divest a refinery or some filling stations we will do that," he said.

The Commission's power to prevent the takeover, however, is not worrying OMV. Indeed, Brussels' mood seems at present to favour the Austrian company. Energy Commissioner Andris Piebalgs was a warmly received guest of the company at a dinner in Vienna after the trategy presentation, and told journalists that resolution of the battle was something he would leave to shareholders. "There are no Latvian, Estonian or Spanish companies," he said. "Only European companies. A pragmatic approach is best."

That seemed to be a criticism of the Hungarian government's efforts to defend Mol from OMV's approach. Hungarian Prime Minister Ferenc Gyurcsany has said that he will use "everything in our hands" to prevent the takeover. His government has begun drafting a law to prevent the merger, an echo of the Spanish government's efforts to prevent E.On from buying Endesa last year - a move the Commission condemned but which ultimately helped to thwart E.On's bid. Hungary is believed to be modelling the new laws on the US' Committee on Foreign Investment, a body with power to prevent foreign companies buying strategic assets in the US.

Janos Koka, Hungary's economy minister, recently said that such laws would not contravene competition legislation in the EU. "It's not about protection against foreign investors; it's about protection against illegal hostile demands."

Meanwhile, Piebalgs also welcomed Kazmunaigaz's entry into Romania. The Kazakh state-controlled company recently bought 75% of Rompetrol for $3.6bn. The deal is subject to approval from the Commission, but that now looks like a formality. "We can rely on Kazmunaigaz," Piebalgs said. "We have good relations with them. There shouldn't be too much of a problem."

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