Rotch optimistic about Gdańska purchase

By : Leo Broomfield

   Rotch Energy still intends to buy 75% of Poland’s second-largest oil company, Rafineria Gdańska, by the end of the year, the company confirmed last week. But the decision came amid announcements by the new Democratic Left Alliance (SLD) government that it would rather merge Gdańska with the country’s largest fuel company, Polski Koncern Naftowy Orlen (PKN Orlen).

   Analysts last week were skeptical about Rotch’s renewed interest in a stake of the oil concern, following recent delays in the Gdańska sale and with political uncertainty surrounding the intentions of the new government. But most agreed that a merger of the two state oil companies would not be the best solution for Gdańska, or for the liberalization of the domestic fuel sector. “A PKN-Gdańska merger may have made sense 10 years ago, but not today,” said Michał Mierzwa, a fuel sector analyst at Erste Securities in Warsaw. “A tie-up of Gdańska-PKN and (Hungary’s) MOL would be a mess that could take some time to sort out.”

   The Rotch announcement also came despite the failure by the outgoing Solidarity Election Action (AWS) government to approve Rotch’s stake, along with doubts by Nafta Polska, the state agency in charge of selling petrochemical assets, that Rotch has sufficient funds to finance the deal.

   However, some analysts said the SLD could be tempted to continue the Gdańska-Rotch merger to help fill the hole in next year’s budget, and stem the hemorrhaging of Gdańska finances this year.

   Rotch representatives said the company was close to finalizing talks with several possible financial investors that would underpin the company’s purchase of Gdańska, and underwrite further investments in the company.

   Brian Corrigan, Rotch’s press spokesman, told Reuters Oct. 4 that the company had submitted a letter three days earlier to Nafta Polska with evidence of its ability to finance the purchase and future investments. He said the search for finances was proceeding in line with the timetable for buying Gdańska that was earlier agreed with the company. Nafta Polska officials were unavailable for comment when the Business Journal went to press.

   Heavyweight investors

   Rotch said the first tranche of capital – earmarked for the purchase of the 75% stake reportedly for around $300 million – would be forthcoming from the World Bank’s investment and investment fund International Finance Corp. (IFC), American Investment Group (AIG), Edison Capital and ABN Arm Holding NV. IFC was said to be the principal investor.

   Rotate said it was also close to finalizing a $380 million credit agreement with Bank Peako, Germany’s Westdeutsche Landesbank, and the Industrial Bank of Japan (IBJ) to finance upgrading and expansion of Gdanska’s tangible fixed assets. This would be part of an estimated $700 million total investment in the company.

   But analysts said Rotch may not yet have the necessary guarantees from AIG or IFC to please Nafta Polska, and reports suggest that Westdeutsche Landesbank and the Industrial Bank of Japan may not be willing to enter such a deal on short notice, or on the existing terms. This would leave Bank Pekao the sole creditor.

   “We have been talking with Rotch for a few weeks on this,” said Maciej Stańczuk, managing director of Westdeutsche Landesbank Polska. “We still need them to give us their version of how they intend to find the money to buy the 75%,” Stańczuk said. “Before they do, we cannot think about future investments.” He added that Westdeutsche would not want to see any of the funds Rotch obtains to finance its acquisition of Gdańska on the Polish company’s balance sheet. “That would be a bad move, as it would further leverage the company,” he said. The banks are said to have until mid-October to decide. None were prepared to comment on the matter Friday.

   But analysts said that if previous events are a guide, circumstances do not auger well for Rotch’s new financial formation. Kredyt Bank (KB) and Konsorcjum Gdańskie, a group of private fuel station owners, pulled out of the Rotch financial consortium to buy Gdańska earlier this year. Analysts said KB’s connections with the SLD underpinned the bank’s move to delay the sale until the SLD assumed power.

   In addition to its ability to guarantee future investments in Gdańska, Nafta Polska also doubts that Rotch could be considered a branch investor rather than a financial investor – a criteria Nafta Polska used earlier to slow the deal. Rotch’s main shareholder, Rotch Property Group’s off-shore firm Vin-Rotch Properties, is registered in Panama without legal rights to trade in other countries, according to a Nafta Polska-commissioned report in September. And this cast doubts that Rotch would be able to conduct its business in Poland.

   But the new government’s decision may be informed by Gdańska’s urgent need for investment, analysts said. The company is fast losing out in fuel sales with PKN Orlen, and this year’s sales figures are likely to be worse than in 2000. Net profits may even see an eight-fold fall this year, according to reports last week.

   Lower exports

   Gdańska president Wojciech Żurawik said recently that the company’s results have suffered as a consequence of lower exports, and in particular, to the damaging impact of an over-valued zloty. Added to this, in December Gdańska is obliged to pay back a first installment of $100 million on credits taken to modernize the refinery’s installations. Żurawik said higher amortization fees on debt repayments would also hit the firm.

   Analysts said Gdańska is losing out to PKN Orlen in all areas of the country, mainly due to PKN Orlen’s control over the national distribution pipelines, which means it can supply cheaper fuel to anywhere in Poland. They also warned that Gdańska’s position could worsen if PKN Orlen finds an investor Bewfore Gdanska does.