PKN loses Slovnaft, faces steep competition in the south
News last week that Polski Koncern Naftowy (PKN) lost out to Hungary's MOL in a bid for Slovak oil company Slovnaft came as a blow to the Polish firm, particularly since it signals direct retail competition from the two companies in southern Poland.
However, the nation's largest retailer and refiner said it is preparing defensive moves by building and refurbishing a plethora of new retail stations this year, while at the same time realigning its investments and cutting down on loss-making activities.
"PKN will now expand its retail network with as many stations as possible to limit MOL and Slovnaft's position and their filling network," said Michal Mierzwa, a regional oil and gas analyst at Creditanstalt Securities.
PKN wanted to use Slovnaft's refinery in Bratislava to supply its domestic southern market. It also wanted to lock out regional rivals eyeing the lucrative area. Austria's OMV was also interested in the deal.
"Poland is the biggest growth market (in the region) and is very dynamic," said Krisztina Kovacs, a London-based analyst at Deutsche Bank Research. However, she said MOL and Slovnaft are also considering the former Yugoslavia and Ukraine, not just Poland.
PKN refused to say how much it offered for the stake in Slovnaft, commenting only that MOL had overpaid. MOL coughed up some $262 million for a 36.2% stake, a hefty sum given that Slovnaft's total market capitalization amounts to $200 million, Mierzwa said. That premium bought MOL the option to become a majority shareholder in what is considered to be the best refinery in Europe, Kovacs said.
While losing out on Slovnaft has bloodied PKN a bit, the decision is not expected to leave a permanent scar. "The bottom line is that it isn't necessarily negative for PKN," Kovacs said. "It just means the south will be more competitive" with more firms present there. She said PKN's management had probably backed off, thinking it could gain better returns from investing in its core business than by acquiring an outside refinery.
To this end, PKN is busily expanding its retail coverage, developing its logistics operations and increasing its refinery capacity, said Tomasz Zakrzewski, the company's spokesman. He said total investment from the start of 1999 to the end of 2000 alone will hit zl. 3.5 billion ($853.7 million).
PKN was already fighting off the competition before MOL and Slovnaft teamed up, but mainly in western Poland. PKN currently runs around 2,000 filling stations nationwide, compared to the approximately 500 that are foreign-owned. This year PKN plans to refurbish 230 stations and build an extra 19 outlets. A further 100 stations are under construction for franchisees, Zakrzewski said. PKN had already said after its initial public offering (IPO) at the end of last year that it planned to build 300 new stations in unspecified locations by 2005 as part of an overall zl. 7 billion ($1.7 billion) investment program to bolster its dominant position.
Zakrzewski said the refurbished and new stations will be positioned close to major roads, many of which have not been completed yet.
"Sites by motorways are always the jackpot," Kovacs said. "It's not regional, just wherever there is traffic and commercial transport." Mierzwa said PKN has special agreements with companies that won concessions to build future roads and will cooperate with all highway operators to receive licenses for stations. He said it had recently positioned gas stations on either end of the newly developed A4 highway, which runs from Katowice to Krakow.
As part of its retail push, PKN said last week that it would change its name to "PKN ORLEN." Zakrzewski said the refurbished stations will sport the new name, which is intended to make PKN's retail outlets stand out from those of foreign competitors. ORLEN is a cross between orzel, meaning eagle, Poland's national symbol, and energia, meaning energy.
Analysts were skeptical as to whether the new name will work as PKN hopes. "It's not the best choice. It seems PKN will be operating with four names," said Piotr Wozniak, an analyst at CDM Pekao Securities. He pointed out that since the merger, PKN's retail outlets have run with their old names. He said the company could have stuck with the CPN brand, which has an orange and white logo that has been familiar to Polish drivers for decades. "It would be easier to revise the old brand name rather than start marketing a new one," Wozniak said.
But retail is not the only priority. Zakrzewski said PKN intends to increase its refining capacity 6.7% to 12.8 million tons annually by the end of 2000. Furthermore, it is also developing its distribution by building two storage facilities in Ostrow Wielkopolski and Inowroclaw, and pipelines to link them with its network. Analysts said this will benefit PKN's wholesaling activities the business of selling fuel to other operators, where most margins are made in the oil business by making its supply chain more efficient. PKN has also made savings in centralizing its financial management by reigning in regional depots and cutting tax-previous burdens, Mierzwa said.
According to Deutsche Bank, last year PKN had revenue of zl. 10.86 billion ($2.8 billion), down 4% on 1998. However, net profit is expected to have risen 2.54% to zl. 806 million ($206.7 million). This year Deutsche expects PKN to make sales of zl. 14.7 billion ($3.6 billion), with earnings of zl. 893 million ($217.8 million).
