Treasury gives Mol nod to PKN Orlen sale
By : Leo Broomfield
The Treasury Ministry last week chose Hungarian fuel concern MOL over Austria's OMV to enter into exclusive negotiations to buy 17.58% of Poland's largest fuel company, Polski Koncern Naftowy Orlen (PKN Orlen). The move was among the last decisions by the outgoing Solidarity Election Action (AWS) government.
AWS said it expected the sale to be finalized by the end of the year, although the incoming Democratic Left Alliance (SLD)-led government will make the final decision once it takes power on Oct. 19. Meanwhile, members of the new government are already voicing their doubts about the deal.
The decision is strange, SLD's probable Treasury Minister Wiesław Kaczmarek said last week. As far as I remember, the current treasury minister dropped MOL from the race to buy a stake in (the second-largest domestic refinery) Rafineria Gdańska due to its poor financial state, he said. Has that changed in the past two months? Kaczmarek said it was too early to say if the bidding process would be restarted.
The estimated zł. 2.2 billion ($500 million) revenue from the sale (based on reports that MOL offered about zł. 31 per share almost double PKN Orlen's share price) would represent a big boost to the government's target of zł. 18 billion ($4.1 billion) in privatization revenue this year. But if the deal goes through, the state will lose its strategic role in the company. Only three entities hold more than 5% in PKN Orlen: Nafta Polska, 18%, the state treasury, 10%, and the Bank of New York with 27% in the form of global deposit receipts. PKN Orlen will also be the first Polish firm to take a stake in another country's biggest company.
Despite the news, OMV President Richard Schenz said his company had not given up hope of buying a stake in PKN Orlen. The new government will make the decision and that is yet unknown, Schenz told Reuters.
Meanwhile, the management board of Nafta Polska, the state-owned company in charge of selling petro-chemical sector assets, which will decide on the final deadline for the deal, is also reportedly against the sale to MOL. Nafta Polska was unavailable for comment at press time.
Lower fuel prices
Treasury Minister Aldona Kamela-Sowińska said MOL's offer was better than OMV's because it allows for the creation of a large regional concern that could lower domestic fuel prices. She said PKN Orlen would have a stronger position in a MOL-PKN Orlen link-up than in a merger with OMV, and added that the new company would not undermine Poland's heavy-chemicals industry, as OMV's Borealis chemicals unit would have done.
Analysts said another key argument against a deal with the Austrians may be OMV's rumored aim of switching PKN Orlen's listing from the Warsaw Stock Exchange (WSE) to exchanges in either Amsterdam or Dublin. This would have serious implications for the health of the WSE, which is suffering a crisis of confidence in the wake of poor macroeconomic news and the global downturn after the Sept. 11 terrorist attacks in United States.
But it is important to remember that this is not the ultimate decision, Kamela-Sowińska said, adding that the final signing of the deal depends on MOL fulfilling certain conditions. While she would not say what these were, she said the new entity would have to guarantee PKN Orlen a dominant role, retaining, for example, its position as the main supplier of the Polish heavy-chemicals industry.
MOL's proposal is to retain the two firms' independence. Although they would have a joint balance sheet and a common strategy, PKN Orlen would keep its own management and supervisory boards. PKN Orlen would also become a shareholder in Slovak refiner Slovnaft, 36% owned by MOL.
What remains to be seen, however, is where MOL will find $500 million to pay for the stake. The company is reported to be considering raising its own capital through a new share issue. The shares would be bought by PKN Orlen and MOL would pay PKN Orlen for the 17.58% share with the cash generated from the transaction. MOL Vice Chairman Zoltan Aldott said recently that the deal could be done at a 1:1 parity. But this would only benefit the state treasury and MOL, not PKN Orlen because it would have to come up with zł. 2 billion ($476 million) up front. Analysts said PKN Orlen needs several million złotys to pay for much-needed investments, and that this was not an option.
Bond issues
But if the deal does go ahead this way, analysts said PKN Orlen may need to finance the purchase via a bond issue or sell its 19.6% stake in one of Poland's leading telecom firms, Polkomtel, the operator of the Plus GSM mobile phone network.
PKN Orlen President Andrzej Modzelewski said recently this could generate about $1 billion, though analysts said the figure was unrealistic given the present bearish mood on the WSE, and in telecom stocks in particular. The sale of the Polkomtel stake would also bring the ailing state budget some needed revenue. BDM market research group estimated last month that KGHM Polska Mied's 19.6% stake in Polkomtel would fetch about zł. 1.7 billion ($404 million).
Alternatively, MOL could sell its gas units, worth about $360 million, and with a bank loan would help buy PKN Orlen shares up front. On Oct. 1, German firm Ruhrgas said it planned to make an offer in November for MOL's gas units. Kamela-Sowińska said this could be a possible solution, though some analysts doubted the long-term wisdom of such a move. I think the worse of the two offers was chosen, said Rafał Jankowski, an analyst at CDM Pekao brokerage in Warsaw. MOL is not a bad firm, but in the present situation, with two similar price offers, it would have been better to choose OMV.
