EVENT OF THE MONTH

It’s all about MOL in November
Hungarian oil giant moves toward link-up with PKN as APV moves to reduce state stake
written by Kester Eddy

MOL once again dominated Hungarian corporate headlines in November as the ambitious oil and gas company moved to expand its red triangle across the region by signing a cooperation pact with Poland’s PKN Orlen that envisages an eventual partial merger. Meanwhile, another share sale involving MOL and the Hungarian privatization authority, ÁPV, is set to raise between USD 400-USD 545 million before the end of the year.

It was the signing of a memorandum of understanding between MOL and its Polish counterpart, PKN Orlen, which grabbed the media attention for much of mid-November. Fuelled by leaks from the Polish side to the media, there was little genuine news left to report by the time the two companies signed the deal in Warsaw, under the gaze of both the Hungarian and Polish prime ministers on Nov. 21.
The memorandum confirms that MOL and PKN will “initiate cooperation in the central and east European oil sector.” Underpinning the deal is the idea that the two companies could make significant savings by cooperating instead of competing, a thesis bolstered by MOL’s track record in the past three years with Slovnaft, the Slovak refiner in which MOL now holds a stake of some 70%.
The companies gave a possible road map of development, starting with a cross share-holding between the two companies of between 10-15%, followed by joint ventures in the region followed ultimately by a formal merger. However, observers noted that the memorandum is non-binding (as the MOL press release is careful to point out) and that talk of cooperation between the two has been heard on and off for three years. “In principle, this is a good idea as the two companies would be a good fit and make by far the strongest player in the region. But I’m skeptical as to how it will all go in practice,” said Tamás Pletser, an equity analyst with Erste Bank in Budapest. While the first two steps might be readily achievable, the greatest synergy savings would be achieved only with a full merger of the two companies, and that brings considerable problems, Pletser said. ”To be honest, I prefer deals where there is a clear dominant partner, not a merger of equals. That causes [decision making] problems, and there are many conflicts of interest. For example, MOL is keen to push south and eastward, PKN’s main targets are domestic expansion and maybe Germany,” he said. Then there is the question of where to put any joint headquarters. “Somebody suggested Krakow, I think that is ridiculous. Bratislava would be a more neutral location. This all sounds rather minor, but it could be a big issue. We are talking about moving a teak of managers, all over 50, to a new location,” he said. Meanwhile, although the PKN deal was probably intended to boost support for the MOL share sale, the “haze” over any link up may have, if anything, had the opposite effect, said Pletser. In the sale, which involves a complicated arrangement of stakes depending on the demand, ÁPV will sell a minimum of 13% and a maximum of 17.6% of its stake in MOL, in which it currently owns 22.7%. In addition, MOL will offer the 3.7% stake it holds in its own treasury. The deal is to include international and domestic institutional investors, along with a retail sale in Hungary, replete with various discounts for the individual investor. Final pricing and allocation is to be announced on Dec. 9.

ÁP\V has set a maximum price of HUF 7,100 for the shares, which if ultimately chosen would rake in a total of about HUF 120 billion (USD 544 million). However MOL’s share price on the Budapest exchange slipped in November, falling below HUF 6,300 late in the month. Since the final offer price cannot be above the bourse rate, this would reduce the income (if all shares were sold) to around HUF 107 billion.
“The share price has come down partly because of this offer. In addition, MOL is bidding for stakes in Unipetrol [the Czech refiner] and Petrom [of Romania]. There are a lot of questions in these bids, if the sales go ahead. Could MOL overpay? Who will finance any deals? These questions cause [investor] concern,” said Pletser.
As Business Hungary went to press, finance minister Csaba László said the state would unload its remaining stake in MOL toward the second half of next year in another share offer.