PKN gains on competitors for Slovnaft
Oil giant Polski Koncern Naftowy (PKN) is expected to emerge as a front-runner in the sale of a 15-20% stake in Slovak oil refiner Slovnaft, which is slated to be sold this summer, analysts and sources close to the company said last week.
While PKN faces strong competition for the stake, which is valued at $56 million-$60 million, from Hungary's MOL and Austria's OMV, analysts last week said that the Polish oil giant's desire to develop Slovnaft's refining capacity gives it an edge over the other contenders in the so far unofficial bid. Analysts said that MOL and OMV may be hampered by their desire to possibly shrink some of Slovnaft's operations, which compete directly with the two foreign firms.
"PKN is not a competitor to Slovnaft in the way that MOL and OMV are; it's not interested in decreasing capacity or production," said Michal Mierzwa, an analyst at COK Banku Handlowego. "It will expand it."
PKN refused to confirm that it planned to bid for Slovnaft or that it was the preferred partner. "PKN is very interested in what's happening with Slovnaft, and we are watching very carefully, but it's a little too early to say that we will take part," said PKN press spokesman Ireneusz Wypych.
He added that the price and conditions of the deal will play a major role in PKN's decision. "They are very important, and if they're interesting to us, we're ready to take part," he said.
For its part, Slovnaft is not disclosing who it is talking to about the stake. "We will provide this information only when it is clear who the potential partner is," said Lubomir Zitnan, Slovnaft's spokesman. He said this may be revealed within months, before the expected sale in May or June. However, a London-based analyst who did not wish to be named said: "Officially nobody's put in a bid, but unofficially everyone's interested."
Janusz Kwiatkowski, spokesman for Nafta Polska (NP), the state holding company formed to oversee the restructuring and privatization of Poland's oil companies, said he had heard that MOL is in exclusive negotiations with Slovnaft for the stake. Analysts and sources close to PKN said they do not expect those discussions to yield any agreement, partly because of MOL's future plans for Slovnaft and partly because of strained relations between Hungary and Slovakia.
It is also unclear how MOL would finance the transaction. "MOL's situation isn't the best one; they'd have to go in debt," Kwiatkowski said. Should those talks not yield results, PKN may step in, he added.
While it is possible PKN would finance the purchase from money raised via a capital increase to run alongside its secondary public offering scheduled for the second half of this year, it has other options. Analysts said that PKN's debt-to-equity ratio stands at 20%, which means that a bank loan would not be difficult to arrange. The company could also issue convertible bonds.
By buying the Slovnaft stake, PKN would ideally be able to lock out Central European competitors from entering southern Poland, analysts said. While PKN has effectively lost the market by the German border to foreign gas companies, the Polish firm wants to secure its hold on the southern region. That region remains relatively untapped except for a few independent retail operators, which operate not more than four stations each. In 1998, 46% of PKN's retail sales came from southeastern Poland alone, as compared with 23% from the north and southwest.
Both MOL and OMV have two or three refineries in their home markets from which they can serve Slovakia, and part of their interest in Slovnaft stems from a desire to break into southern Poland, Mierzwa said.
However, PKN may be getting an unexpected helping hand from its rivals' concepts for how to integrate Slovnaft. Should OMV purchase Slovnaft, it would most likely reduce the firm's refining capacity, which stands at 5.5 million tons of crude oil each year, if not shut down refining activities altogether. Mierzwa said this would consequently mean large layoffs at Slovnaft, and neither move would be popular. The firm would also be able to serve the Polish market via its existing refineries, he said.
At the same time, although MOL is less likely to reduce capacity, and may even supplant one of its own ailing refineries back home with Slovnaft's operations, the difficult state of Slovak-Hungarian relations may scupper the deal, Mierzwa said. Furthermore, MOL's core business is likely to jar with that of Slovnaft. Whereas MOL is mainly engaged in upstream activities the exploration and production of oil and gas, Slovnaft mainly deals in downstream activities the business of refining and marketing fuels.
In addition, MOL is expanding its retail presence in the Slovak market and presents a threat to Slovnaft as a competitor, he said. Another ace up PKN's sleeve is the possibility that Slovnaft will expect a less hands-on approach from PKN's management and be allowed to retain some independence. MOL's activities in Slovakia are expected to bring greater interference in the day-to-day running of the company, he said.
But PKN has more to gain than just protecting its southern market, analysts said. Slovnaft is upgrading many of its operations to bring them in line with other oil firms in the region, where it also has a presence.
