Treasury may wind up paying in PKN Orlen bid war

By : Greg Goodale

   In the race to outbid each other for a 17.58% stake in Poland’s fuel giant Polski Koncern Naftowy Orlen (PKN Orlen), Hungary’s Mol and OMV of Austria have pushed the asking price per share over zł. 30, increasing the stake price to more than zł. 2 billion ($476 million), according to local reports.

   The higher price is a double-edged sword for the Treasury Ministry, which is desperate to fill the budget gap. On the one hand, it would bring in badly needed revenue. But observers warn that to purchase an equal number of shares in OMV or MOL in a share swap, PKN Orlen would have to dispose of key assets.

   Both bidders have said they want to form a crossholding with PKN Orlen that would see the Polish partner subscribing to shares in Mol or OMV at a share parity yet to be decided, but clearly critical to the success of the deal. It is in the bidders’ interest to price the stock they would buy from the Poles higher to ensure a higher return when PKN Orlen buys stocks in their concerns. Declarations from the heads of the two battling oil giants indicate that PKN Orlen will have to pay a hefty price, regardless of which bidder is successful.

   OMV President Richard Schenz has said his company would offer PKN Orlen a 10% stake in the Austrian company.

   Mol Vice Chairman Zoltan Aldott suggested the deal could be done at a 1:1 parity. “We will adhere to the principle of cross shareholding, so that PKN Orlen can have the same number of shares in Mol as Mol has in PKN Orlen.”

   But according to analysts, PKN Orlen’s assets make both options viable. “PKN has significant non-core assets, namely its 90% stake in mobile operator Polkomtel and it has said on many occasions that it will dispose of the stake in the future,” said Tomasz Bardziłowski, analyst at Credit Suisse First Boston. “This will be enough to buy a minority stake in Mol or OMV.”

   Aziz Unan, sales analyst at Erste Securities in London, said the financial standing of PKN Orlen leaves no doubt as to its ability to afford such a crossholding. “If you look at the debt threshold for PKN Orlen, it has lower debt than Mol, so they have room to increase their debt.”

   There is also a chance that both OMV and Mol will offer Orlen their stock at a discount, even as much as 20%, though the current decline on Central European markets could dictate otherwise. “With market prices at historical lows it may be offered at a premium,” Unan said.

   PKN Orlen refused to comment on any aspect of its future relations with the potential buyer.

   According to Unan, Mol is a better candidate in operational terms, while OMV is better equipped financially. “In the refinery business distance really matters,” Unan said. “Mol and (Slovakia’s) Slovnaft with PKN Orlen’s refineries would increase their competitiveness within the region.”

   But Unan warned that the economics of the deal could be botched by politics.

   “It is extremely difficult to acquire a majority stake in either of these companies as they are very politically sensitive,” Unan said. “The name of the game is to gain as much power as possible, with 30-35% in either company and influence the decision process.”

   Last month PKN Orlen announced second-quarter net profits of zł. 214.37 million ($51.04 million), an increase of 58.4% on its first-quarter 2000 result.