PKN plans spending spree to solidify dominant position - Refinery's purchase of three firms would lock out foreign competitors in
Oil refiner and retailer Polski Koncern Naftowy (PKN) will acquire three soon-to-be privatized companies as part of a zl. 7 billion ($1.79 billion) investment program designed to tighten its stranglehold on the Polish fuel market, the Business Journal has learned.
The purchase of the firms in question, which control oil pipelines and storage facilities, would lock out foreign competitors and give PKN a de facto monopoly on the fuel chain, from the refinery to the gas station, sources close to the company and analysts said last week.
"They will strengthen their position as a retailer in Poland," said a source close to the company.
PKN spokesman Ireneusz Wypych refused to elaborate on the investment program, saying that any relevant information was in the prospectus for the company's upcoming initial public offering (IPO).
A big question though is whether PKN will be able to grab control of the three firms storage firm Naftobazy, pipeline monopolist Przedsiebiorstwo Eksploatacji Ruraciagow Nafty (PERN) and fuel distributor Dyrekcja Eksploatacji Cystern (DEC). Analysts said that it is likely the Treasury Ministry will balk at the idea of selling the firms lock, stock and barrel to PKN, exactly because it could strengthen the Polish firm's dominant position.
The Treasury Ministry will also be taking European Union (EU) regulations into consideration when it sells the firms, two of which are slated to be privatized next year. EU guidelines do not generally allow a sale that would give one company exclusivity or the ability to charge unfair prices to competitors.
However, the Treasury Ministry could decide to sell majority stakes in these companies to PKN provided it agrees to certain conditions that would protect foreign competitors. Many of those foreigners currently complain that unclear guidelines for the use of these storage facilities and pipelines play to PKN's advantage. Competitors have accused PKN of receiving preferential treatment from the operators of storage facilities and pipelines, all of which are state-
owned assets.
PKN is trying to strengthen its hold on the Polish fuel market to prepare for liberalization that is scheduled to take hold in 2001. That liberalization will wipe out customs duties on fuel imports and thereby threaten PKN's position as the dominant gas retailer. Right now, PKN controls much of the flow of fuel from the refinery to the gas pump, and thus has great control of its own costs and market prices.
"The only way is for PKN to buy these companies," said the source close to the company. "PKN would keep these companies in their hands, it's the same in several companies all over the world."
PKN was created this year by a megamerger between the country's largest retailer, Centrala Produktow Naftowych (CPN), and its largest refinery, Petrochemia Plock. The latter has almost completed a $2 billion investment program increasing its refinery capacities and meeting EU requirements, said Michal Mierzwa, an analyst at COK Banku Handlowego.
In addition to being used for purchasing the fuel storage and distribution firms, the zl. 7 billion investment program, to be completed by 2005, will focus on refurbishing PKN's retail operations and modernizing its existing storage facilities, sources said. Analysts said that PKN is more than capable of taking on additional debt to finance the program. The company has a current debt-to-equity ratio of 25%, according to the prospectus.
But rather than increasing its debt directly from the banks, it is far more likely PKN will follow Telekomunikacja Polska's (TPSA) example by issuing bonds at some point, the source said.
PKN is selling 30% of its shares to international and domestic investors in an upcoming IPO. The subscription period for shares will start Nov. 4. While the share price of that issue has not yet been released, the source said that the most recently discussed price range is zl. 25-zl. 30, which gives PKN a price-to-earnings ratio (p/e) of around 18. That compares to an average p/e of 12-15 for other foreign firms in the sector and gives PKN a market capitalization of about $2.5 billion.
PKN could tap the equity market in the future, analysts said, although another potential source of funds would be for the company to divest of its 19.25% stake in mobile phone operator Polkomtel (Plus GSM). But that seems unlikely to happen in the short term as PKN's CEO Andrzej Modrzejewski told a press conference last week that the company is considering investing further in telecoms. But analysts said that any effort by the firm to up its stake in Plus GSM would be a short-term maneuver designed to increase the value of its holding, which analysts estimate could bring $600 million.
