MOL announces sell-off of gas arm to E.ON Ruhrgas

Nov 08, 2004 01:00 AM

by Matthew Higginson

MOL, Hungary’s oil and gas company, took the first steps toward becoming simply an oil company, announcing that it reached a deal with Germany’s E.ON Ruhrgas to sell a part of its midstream gas division.
After the announcement of the deal, which values the majority stake in the gas business at EUR 2.2 bn, MOL’s stock price rocketed some 10 %.

Commenting on the price, Tamas Pletser, Central and East European oil and gas analyst at Erste Bank Investment, said the deal is extremely favourable for MOL.
"The pricing is far above market estimates, which put the enterprise value [of the package being sold] at EUR 1.3 bn-EUR 1.5 bn," he said. "I valued the stake at around EUR 1.45 bn, and the Hungarian Energy Office earlier in the year put the regulated asset value at EUR 1.2 bn. So it’s a very attractive deal for MOL."

The deal gives E.ON Ruhrgas, part of the E.ON group, a stake of 75 % minus one share in MOL Natural Gas Supply, MOL’s gas wholesale, marketing and trading division, and a stake of the same size in MOL Natural Gas Storage. Included in the price of the companies is EUR 350 mm in debt owed by the two gas companies.
Pletser said the sale will work to MOL’s benefit, as the gas companies have suffered in the past from government-imposed gas prices.
"MOL immediately divests itself of the wholesale gas business, which made huge losses in 2000 and 2001," he noted. "With the changes to gas pricing regulations, the risks of this business decreased, but it still represented a small risk."

The contract also gives MOL a five-year option to sell its remaining stakes in the two companies to E.ON at fair market value. In addition, the sale also includes a 50 % stake in Panrusgaz Hungarian-Russian Gas Industry, which imports gas into Hungary from Russia. The other 50 % of Panrusgaz is owned by Russia’s oil and gas giant Gazprom, and thus the sale requires Gazprom’s approval. Pletser said this is unlikely to present a stumbling block.
"The parent company ofE.ON Ruhrgas is a shareholder in Gazprom, so they have a relationship. I doubt there will be problems working out future cooperation," he noted.

Concurring, Laszlo Varro, chief economist at the Hungarian Energy Office (MEH), said he does not expect complications.
"E.ON is one of Gazprom’s biggest customers. It is the only Western company that has a direct stake in Gazprom, and is represented on the Gazprom board of directors," Varro said. "I’m sure their cooperation concerning Hungarian activities will be smooth."
MOL CEO Zsolt Hernadi welcomed the sale of the gas businesses.
"We are very pleased to welcome one of the biggest gas and energy companies in Europe, E.ON Ruhrgas, as our partner today," he said.

Hernadi added that MOL will return some of the money from the sale to shareholders and will reinvest the rest.
"This transaction enables us to monetise a part of our investment in the gas business at a fair value for MOL’s shareholders," Hernadi said. "We intend to use the proceeds from the sale to invest, in line with our strategy, in value-creating investments that support the continued growth of the group." The transaction must still be approved by the Competition Office and the MEH. MOL expects the deal to be completed in the first half of 2005.

Burckhard Bergmann, CEO of E.ON’s gas unit, said demand for gas in Hungary will exhibit sustainable growth. Gas accounts for 40 % of the country’s total energy consumption. He also predicted that similar growth will be seen in Central and Eastern Europe as a whole, and that the newly acquired unit could be used as a hub to supply gas to neighbouring countries.
Erste’s Pletser said such a regional hub would benefit E.ON, as domestic gas consumption in Croatia, Romania and Serbia is at much lower levels than in Hungary.
"These are markets with a lot of growth [potential]," he asserted. "Currently, Hungary has very high gas consumption -- 75 %-80 % of households run their heating on gas. The percentage is much, much lower in the neighbouring countries to the south."

Pletser also noted that E.ON acquired relatively cheap storage facilities with the deal.
"The gas business is seasonal, with ten times more consumption in winter than summer, so this is a very important aspect of the deal," he said. The ownership change will not affect gas pricing in Hungary, as this is regulated by the Gas Law, Varro at the MEH stressed.
"It would be a serious breach of the Gas Law if an ownership change were to impact the gas pricing mechanism," he said, noting that all future changes in gas pricing are already written into the law. These include gradual market liberalization, which will be complete in 2007, he added.

According to Varro, the sale of MOL’s gas storage and gas distribution businesses marks the largest private corporate transaction since the political changes in 1990.

Source: Budapest Business Journal
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