Poland expected to make preliminary decision on sale of stake in PKN

Aug 31, 2001 02:00 AM

The Polish government is expected to make a preliminary decision on the sale of a stake in the country's largest oil refinery, a move that could reshape the region's oil industry. As oil companies go, the refinery, Polski Koncern Naftowy Orlen, hardly seems like much of a prize. While it is relatively modern, the refinery, known as PKN, relies exclusively on imports it does not control, mainly from Russia. Many of its retail gas stations in southern Poland have been bypassed by post-Communist economic growth. And foreign companies, including a rival from tiny neighbouring Slovakia, are taking its customers.
The planned sale by Poland's treasury ministry of a 17.6 % stake, for about $ 400 mm, has opened a window on the fierce competitive pressures battering the oil and gas markets of Central and Eastern Europe. The region's existing energy companies are struggling to fend off domination by cash- and resource-rich Russian energy companies and by sophisticated Western European and American oil companies.

Polish authorities are rushing to secure a sale of PKN and a second refinery in the Baltic port of Gdansk, before elections next month, when the current government is expected to lose to a left-wing slate. The opposition has said it opposes the sales.
The region's two largest players, MOL of Hungary and OMV of Austria, have put in bids that would effectively merge their companies with PKN, while PKN itself says it plans to pursue again efforts that were rejected by Polish antitrust regulators last year to acquire the refinery.
Talks on selling the Gdansk refinery to Rotch Energy, a British oil-trading company, appear stalled. The PKN bids are sealed for now, but local press reports say both MOL and OMV have proposed mergers with PKN that would make the combined company the region's largest energy concern.

The deal could be the largest cross-border merger in Central Europe's history. The reports say OMV has offered about 26 zlotys a share ($ 6.14) in cash and MOL has offered about 25 zlotys a share, mainly in equity, valuing the stake at more than $ 400 mm. PKN shares are now trading at 17.5 zlotys.
Both MOL and OMV are the largest retailers in their home markets. Expanding locally is the only way they can remain independent. Their local targets are smaller companies and the most likely target, after Poland, is the state-owned Czech refining and retail conglomerate, Unipetrol.
MOL recently acquired control of Slovakia's Slovnaft refinery and its retail network, and now has 800 gas stations across the region. OMV is present in 10 former Communist countries. Both also drill for oil and gas across the world. OMV has gas fields in Pakistan and Australia, while MOL is drilling for oil in Siberia with the Russian oil giant Yukos.

Demand in Central Europe's four largest countries is growing about 3 % annually, making the oil sector in the region highly attractive for strategic and portfolio investors. OMV's CEO, Richard Schenz, said in an e-mail message that he expected his company toemerge as the region's strongest, but he added: "We do not believe that 'merger mania' will go on forever or to that respect is the end to all means. Studies have shown -- also for the oil industry -- that smaller companies can also achieve a very good scale of economics."
But many analysts say that by bulking up, the local companies merely make themselves more attractive takeover targets for both Russian and Western companies including Shell, which recently bought the DEA gas stations from Germany's RWE group, and BP, which acquired Veba Oil from E.ON of Germany last month, winning a large network of Aral gas stations in central Europe.
OMV has a market capitalization of about 2.8 bn euros ($ 2.55 bn); PKN is about 1.8 bn euros ($ 1.64 bn) and MOL is about 1.7 bn euros ($ 1.55 bn). By contrast, BP-Amoco has a market capitalization of $ 191 bn. "All these companies believe the larger they become, the less likely they are to be takeover targets, but I argue the opposite is true," said an analyst, Gergely Varkonyi, of ING Barings in London. "This industry is about size and economies of scale. If anyone is going to expand into the region, obviously they will look at the largest player."

Source: The New York Times
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