OMV named as sole bidder for SNP Petrom

The Romanian government announced that OMV, Austria's biggest oil company, will be the sole bidder for Romania's SNP Petrom.
Hungarian oil and gas giant MOL also submitted a bid, but Romanian privatization authorities found that it failed to fulfil the bid criteria. As a result, OMV will bid alone in a deal for 51 % of the company, estimated at a price of $ 1 bn.

Budapest-based equity analysts said they were neither surprised nor disappointed by the decision. Peter Tordai, head of research at K&H Equities, said he doubted that the MOL bid was very serious.
"I don't fully believe that MOL was interested in buying Petrom," said Tordai. "I think it bid in order to carry out due diligence and to gain a deeper insight into a potential competitor." Tordai noted that MOL had proposed some sort of partnership, which had not met with interest from the Romanian side. "The Romanian government needs cash more than it needs MOL shares," he said. "Plus, the political aspect was not in MOL's favour."

Tamas Pletser, covering MOL at Erste Bank Investment, echoed Tordai's assessment. He said MOL never had a chance to win, mainly as the Romanian government had no real desire to sell its flagship oil company to a Hungarian investor.
"Petrom would have been an opportunity for MOL, but also a very big risk," Pletser said. "Realistically, the new owner will have to slash the workforce by two-thirds. From the political perspective, it would be extremely difficult for a Hungarian company to achieve that in Romania."

Petrom produces 60 % of the oil consumed in Romania, and controls 28 % of the nation's retail fuel market. The deal is structured so that the potential buyer initially purchases a 33.34 % stake in the company, with further investments required to take its holding to 51 %.
The Romanian government currently owns 93 % of Petrom. The sale will go though in June of this year. MOL said it made a non-binding bid for the 33.34 % stake, and proposed forming a "strategic partnership" with Petrom. MOL said that its proposal stands if there is any future problem with OMV's bid.

Tordai said upgrading Petrom's refineries would be costly for MOL. He also said MOL has no obvious exploitable synergies with Petrom, as it does with its Croatian and Slovakian subsidiaries, INA and Slovnaft as, respectively.
"There's no pipeline between the two countries, for instance, unlike in Slovakia and Croatia," he said. Careful choices Erste's Pletser said he sees Romania's second-biggest oil company, Rompetrol, as a much better target for MOL if it wishes to gain a foothold in the Romanian market. "I think that in the next two to three years it will come up [for sale], and it would be a much better opportunity for MOL," he said. "It's currently majority owned by a US fund and OMV. OMV has 25.1 %. If the issue of artificially low prices on the Romanian market were solved, Rompetrol would be a great investment for MOL."

Tordai noted that OMV is facing increased competition in Austria, and is therefore trying to sustain its growth rate by expanding regionally. But he added that the rumored price to be paid for Petrom, coupled with the Romanian firm's poor asset quality, make the deal risky.
"$ 1 bn is roughly 25 % of the total market cap of OMV, so they have to be careful. I expect it will delay all but absolutely necessary capex investments for as long as possible," he said. "Petrom's refineries are very low-grade and will take a lot of investment before they can meet existing and upcoming EU regulations on fuel quality. Right now, if you fill up your German-registered car in Romania, there's no guarantee the fuel won't damage its EU-compatible catalytic converter."

Speculation began that OMV will finance the purchase of Petrom by selling its 9.1 % stake in MOL, although Tordai and Pletser both dismissed this. Tordai said he sees no reason for OMV to sell its stake in MOL. He noted that the current favorable margin environment means that the next two quarters can be expected to deliver further strong operating cash flow, which would in all likelihood cover the cost of the purchase.
"Selling the stake is not in either OMV's or MOL's interest," he said. "I don't see it happening," Pletser concurred. "MOL has been a good investment for OMV, and it has always said it was a financial investment, not a strategic one. Liquidity is relatively high, so OMV could sell it quickly on either the open market or to a fund. But I don't think OMV needs to sell this stake in order to finance the purchase of Petrom."

The sale of Petrom is one of the EU's conditions for granting Romania status as a "functioning market economy," a designation the country needs in order to join the EU in 2007.