AN AUSTRIAN BACK DOOR FOR RUSSIAN TAKEOVER OF HUNGARY’S ENERGY SECTOR? (Part One)

Austria’s OMV, the national energy champion, has blindsided its Hungarian counterpart, MOL, with a merger attempt that looks like a hostile takeover. MOL had to learn from the mass media in late June that OMV had suddenly increased its stake in MOL from 10% to 18.6%, largely through a deal with MOL shareholder Medget Rakhimkulov, an obscure Russian business figure operating in Hungary. In follow-up steps, OMV is now seeking to amass MOL share packets in order to put up to 30% in hands friendly to the Austrian company.

On July 16 and 19, OMV finally confirmed publicly that it plans a full takeover of MOL. The proposal seems strange on several counts, including that of market capitalization: OMV’s at €12.8 billion is only slightly larger than MOL’s at €11.6 billion. Consequently, OMV must go into extremely heavy debt for the sake of this takeover. The Austrian company is arranging a €13.5 billion loan from Barclays and JP Morgan Chase to acquire full ownership of MOL. This loan exceeds OMV’s own capitalization, leading to conjecture that a far larger force stands behind such a plan.

At stake is, first, MOL’s crude oil-refining and product distribution business, one of Europe’s most profitable; and second, the privilege of serving as Gazprom’s hub country for gas transmission and storage in Central Europe (a dubious privilege because it involves Russian control of the gas business in the country).

In the event of a takeover, European Union competition laws would force OMV to sell one of its oil refineries acquired from MOL. This would undoubtedly be one of MOL’s two flagship refineries: Slovnaft, near Bratislava in Slovakia, just across the Hungarian border; or Duna Szazhalombatta near Budapest; more likely the former. In that case, a Russian company would win the bidding practically uncontested, as both refineries operate on Russian oil and are situated along the Druzhba pipelines. Russia’s state company Rosneft is known to covet both of those MOL refineries.

OMV is seeking “access” (by the Russian definition of that concept) to hydrocarbon fields in Russia, on a deal that would involve a swap of Russian upstream assets for OMV downstream assets in Central Europe. In that case, OMV would be far more likely to swap assets it would have acquired outside Austria, than assets in Austria itself. (For example, Germany’s E.ON Ruhrgas is offering to transfer its Hungarian gas business, rather than a slice of its German gas business, to Gazprom in return for Ruhrgas “access” to a Siberian gas field). MOL itself has sought such access to the Russian upstream for the last three years, but pulled back recently when it concluded that the terms were too onerous.

The Kremlin must assume that direct Russian takeovers of Hungary’s strategic energy assets would be politically unfeasible. A national consensus in Hungary would probably bar such takeovers even if elements in the present government might go along. A two-stage process might seem more feasible, however. Moscow may calculate that it can accomplish such takeovers through the back door, by entering Hungary from the EU member country Austria, two or three years hence.

For its part, OMV may not plan such scenarios or may even be concerned by the possible loss of lucrative Hungarian assets after taking them over, if it does. But it may have little choice at that stage if Russia initiates a price war which it could well afford against OMV to undercut the value of the latter’s assets, not only in Hungary but in Austria as well.

OMV’s flagship Austrian refinery, at Schwechat near Vienna, is less modern and less efficient, compared with MOL’s refineries, and losing in competition against them in Central Europe. Three years ago, OMV lost the bidding for Slovnaft Bratislava to MOL. The Hungarian company holds a nearly 20% share of Austria’s market for oil products. MOL’s Slovnaft and its Duna Szazhalombatta (Budapest) refineries, with a combined capacity of 12.5 million tons of crude annually, operate at full or nearly full capacity with record net cash refining margins, thanks to recent equipment upgrades. Thus, OMV hostile acquisition of those refineries would signify a takeover of the more efficient by the less efficient and a value-downgrading move, rather than a value-adding move.

OMV is at least 31% government-owned, with another 17% of the stock held by public funds, and 52% free-floating shares. MOL’s ownership structure is highly fragmented, with no government ownership (not even a golden share), 38% free floating shares, and rising percentages in OMV, OMV-friendly hands, and MOL-friendly banks.

(MTI, Austrian Press Agency, Dow Jones, Thomson Financial, July 16-19; Economist Intelligence Unit, July 13)