Publication: Eurasia Daily Monitor Volume: 4 Issue: 153

Hungary’s national energy company, MOL, is mounting an effective defense against a hostile takeover by its Austrian counterpart, OMV, which could lead to Russian takeover of Hungary’s energy sector (see EDM, July 24, 25). As part of its defense — but also in the course of its organic growth — MOL is expanding its business in Central Europe and breaking into markets within “old” European Union countries (Dow Jones, Wirtschaftsblatt, MTI, August 1-6).

On July 31, MOL signed an agreement to purchase 100% of the Italiana Energia i Servizi (IES) company in Mantua, northern Italy, for a price of almost $800 million (including $300 million to cover the IES debts). MOL is thereby acquiring the refinery near Mantua with a processing capacity of 2.6 million tons of crude annually, as well as a network of 165 fuel stations (including 35 fully-owned) in northeastern Italy. With an additional investment of $130 million, MOL plans to increase the plant’s capacity to 3 million tons annually and upgrade its equipment, raising its profitability rate to MOL’s own high benchmark of 16% in refining.

MOL did not need to take out a loan to purchase IES. This acquisition increases MOL’s refining capacity by nearly 20% to some 16 million tons annually and also increases its foreign retail network by approximately 20%. It also marks an expansion of MOL beyond its core markets in Central Europe. MOL’s move into the northeastern Italian retail market can potentially lead to further expansion in that region through synergy with MOL’s refining assets in Croatia.

In Croatia, MOL owns a stake of 25% in INA, the country’s largest economic entity, with two oil refineries and the leading position as fuel retailer. The Hungarian company prepares to increase its stake in INA, albeit not through an unsolicited public bid (or “hostile takeover”) but through agreement with the Croatian government and other shareholders.

INA’s refineries, at Rijeka and Sisak, with a combined processing capacity of some 4 million tons of crude annually, are being overhauled to produce European Union-standard gasoline by 2011 and thus export the product to EU countries. The northern Italian fuel retail market is a likely primary target in conjunction with MOL’s acquisition of IES there.

On August 2, MOL signed an agreement to purchase 100% of Tifon, a fuel wholesaler and retail trader in Croatia. Tifon owns a chain of 36 fuel stations in Croatia, with a share of 7% of the country’s retail market and another 20 fuel stations under construction. Thus, along with its existing and potentially expanding stake in INA’s oil refining and product trading, MOL is becoming a major player in Croatia as well.

The Hungarian company is already dominant in Slovakia through the MOL-owned Slovnaft refinery. Mainly through Slovnaft, MOL holds almost a quarter of the Czech Republic’s market for oil products and nearly 20% of Austria’s market, which is OMV’s home. OMV’s major refinery at Schwechat near Vienna — in immediate proximity to the Czech, Slovak, and Hungarian borders — is less modern and less competitive than MOL’s Slovnaft and Szazhalombatta refineries (near Bratislava and near Budapest, respectively) on those markets.

Significantly, OMV is said to have been among the bidders who lost to MOL in the contests for IES and Tifon.

MOL’s acquisition program demonstrates that the company can continue growing in Central Europe and now enter Western Europe as well. The program increases MOL’s capitalization and potentially the value of its shares, not least against non-transparent share acquisitions by hostile bidder OMV or by Russian proxies (one of whom facilitated OMV’s surprise increase of its stake in MOL from 10% to 18.6% in June). The Hungarian company’s acquisitions through open tenders also confirms its capacity to advance regional consolidation processes in its own right

As part of defending against OMV’s merger bid, MOL embarked on a share buy-back program in late June. Since then, the company has concentrated nearly 40% of the shares in friendly hands. Other shares, however, are in OMV-friendly hands (apart from OMV’s own stake).

MOL’s fragmented ownership structure has no Hungarian government share. OMV is at least 31% owned by the Austrian-government, with another 17% of the stock held by public funds. In recent days, Austrian Economics Minister Martin Bartenstein has come out publicly for an OMV-MOL “merger.” This is a euphemism for what Hungary regards as a hostile bid that could be followed by re-sale of MOL assets to Russia. In Hungary, Bartenstein’s intervention is regarded as confirming OMV’s close links with the Austrian government. OMV itself has become heavily dependent on Russia for the gas business, under agreements signed during Russian President Vladimir Putin’s recent visit to Austria (see EDM, May 29).

The risk that an OMV takeover of MOL may lead to a Russian takeover of MOL assets — and later even of OMV itself — seems clear outside Hungary as well. According to an American analyst, Moscow may be trying to use OMV as a Trojan horse in Hungary (Zeyno Baran, testimony to the U.S. House of Representatives Committee on Foreign Affairs, July 25). As seen from Slovakia, An OMV takeover of Slovnaft would probably result in offering Slovnaft to Russians (Sme [Bratislava], August 2). As seen from Croatia, “MOL’s actions are a defense from the Russians, not the Austrians; more from Rosneft than from OMV” (Novi List [Zagreb], August 1).