Polish govt steps up efforts to merge PKN and Lotos

By bne IntelliNews October 12, 2007

Jan Cienski in Warsaw -

Poland's government is intensifying its efforts to increase its control over the country's energy industry by strongly promoting the possibility of joining PKN Orlen, the country's largest refiner and distributor, with the smaller Gdansk-based Lotos Group. That possibility could get a boost from a nifty new plan to have smaller Lotos takeover its bigger rival.

The idea has been bounced around for years, and was revived a couple of months ago by Piotr Kownacki, the government-appointed head of PKN. The oil company is 27.5% owned by the Treasury, which has effective control thanks to a very diffuse shareholding.

The idea was given an added boost by Jaroslaw Kaczynski, Poland's prime minister, in a radio interview on September 28, where he talked about joining the two companies together by next summer. "This is tied to energy security, it is not purely business," said Kaczynski.

Poland has long been worried about Russian energy giants like Lukoil taking an interest in buying up local companies. Poland is almost completely dependent on Russian crude imports. Fears over the long-term independence of Poland's energy companies intensified during the recent hostile takeover bid of Hungary's Mol by its Austrian rival OMV.

Bigger share

The role of national security in the whole idea can be seen in Kaczynski's plan to have much smaller Lotos be the lead party in the merger and take over its larger rival. "Today, everything indicates that it is much more effective from the point of view of that goal [national security] to acknowledge Lotos as the leading company," he said. Until his statement, the government's official energy sector strategy adopted in March did not foresee merging the two companies.

The reason for Kaczynski's surprising proposal is that Lotos is at least 59% owned by the state. If Lotos led the merger, the Treasury would end up with about 75% of the new company. If the merger happened the other way around, with PKN taking the lead, the Treasury would only have about 30% of the new company. The government's worry is that in the event of a PKN-led takeover, some of the larger company's widespread shareholders could coalesce and sell the combined firm to a foreign oil company.

This idea has given Lotos' shares a big boost. ING initiated coverage of the stock with a "Buy" rating in early October and set its target price 46% above October 2's close, arguing that Lotos "looks likely to be the winner" in any merger with PKN. In addition, because Pawel Olechnowicz, Lotos's CEO, has been noticeably cool to any merger, the new plan raises the chance of a merger happening.

Olechnowicz calls into question the thesis that Poland's energy security is threatened. Speaking at an energy conference in Warsaw, he said: "We are not making efforts in that direction. We are hoping for calm so we can continue to grow."

Olechnowicz is the last remaining chief of a large state-controlled company to survive the purge of corporate leaders following the electoral victory of PM Kaczynski's Law and Justice party two years ago. The party follows an etatist economic model, and has been very reluctant to privatize state firms while trying to extend the government's control of strategic sectors of the economy.

Olechnowicz has survived thanks to backing from regional party barons from the Gdansk area, where Lotos is the largest company. However, his position has looked increasingly shaky in recent weeks, with rising talk that he may be replaced before the October 21 snap general elections.

PM Kaczynski's idea for a reverse takeover has also set off an uproar in Plock, the central Polish city that is home to PKN. Trade unions have promised to scuttle the merger, and the issue has created difficulties for the government in the midst of a snap parliamentary election campaign.

Wojciech Jasinski, the Treasury minister, called on PKN to develop its own merger plan, saying he would support a solution that saw the new company's headquarters being located in Plock. "Merging PKN Orlen and Lotos either institutionally or financially makes sense, but each company should retain its legal identity," said Jasiniski.

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Polish govt steps up efforts to merge PKN and Lotos

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