Global Insight Perspective | |
Significance | OMV's decision rules out the prospect of a new central European energy giant being created. |
Implications | The decision represents something of a victory for MOL and the Hungarian government, which both adamantly opposed OMV's initial approach, although ultimately, the European Commission (EC)'s objections proved to be the final straw. |
Outlook | The decision will be celebrated by MOL, but is nevertheless a wise move by OMV given the potential for the situation to lead to a drawn-out and costly legal battle. |
The Decision
OMV today announced it will abandon its year-long battle to launch a takeover for central European competitor MOL. The decision comes with OMV facing an accumulation of obstacles to the acquisition, although the tipping point appears to have been the European Commission (EC)'s rejection of OMV's proposed anti-trust solutions, leading the Austrian company to decide it would no longer be able to meet its strict criteria of value creation from the takeover. The company consequently said it would revoke its intention to make an offer to MOL shareholders, and also withdraw the merger notification it had filed with the EC. OMV said it had no intention of selling its existing 20% stake in MOL, however, indicating it was now exploring options to maximise the value of the stake and to achieve value creation through other consolidation activities.
The Barriers
In September 2007, OMV announced it had acquired a 20% stake in MOL and said it was seeking to form a strategic alliance with the company. The proposal was flatly rejected by MOL management, prompting OMV to make a direct approach to MOL shareholders. The company stated it would offer shareholders 32,000 forints (US$210) per share once certain impediments to achieving voting control over MOL had been removed. However, MOL continued to erect barriers to the hostile takeover, buying up its own shares and striking allegiances with other shareholders to block OMV from gaining a majority stake. Furthermore, the Hungarian government expressed its opposition to any takeover of MOL, and rapidly passed legislation boosting its control of acquisitions in the energy sector, a law that was dubbed "lex-MOL". OMV's efforts to challenge MOL's shareholder agreements saw a tense stand-off at MOL's annual general meeting, leading to a number of legal actions being launched between the two parties. MOL's control over its own shares, the Hungarian government's lex-MOL legislation, and the prospect of drawn-out legal battles meant that the challenges faced by OMV in its efforts to acquire MOL were considerable.
However, the deciding factor in OMV's move to abandon its approach appears to have been a recent ruling by the EC. OMV filed a merger notification with the EC in January 2008, sparking an investigation by the regulator that led to a statement of objections (SO) being issued in June, outlining the EC's competition concerns over a tie-up between the two companies, particularly in relation to the strong position that the merged company would hold in both the gasoline (petrol) retail market and in the refining sector. OMV responded to the SO with a number of proposed solutions to address the concerns, including the sale of retail fuel stations in various countries and the creation of a capacity-sharing arrangement for the companies' Schwechat and Slovnaft refineries that would allow a third party to gain substantial access and control. However, the EC indicated that these commitments would be insufficient, an indication that the complete divestment of one or more of the companies' refineries might be required. Such a prospect, coupled with the existing barriers faced, was evidently a bridge too far for OMV, prompting today's announcement to abandon its bid altogether.
Gas Market Considerations
OMV's cancellation of its takeover plans will be good news to proponents of the single market. In gas in particular, it should ensure a degree of competition around Austria's Baumgarten gas hub and south-east Europe. MOL has been beefing up its presence in this region, establishing the regional gas transmission company with TSOs from Austria, Serbia, Slovenia, Croatia, Bosnia and Herzegovina, Romania, and Bulgaria. This regional gas venture should be established in one to two years, and would make it the third-largest transmission firm in Europe. MOL's proposal would also see Baumgarten, the planned end-point of the Nabucco pipeline that is proposed to link Turkey to Austria via the Balkans, included in the venture. The scale of this regional transmission firm might not have made it past the EC intact following any merger with OMV. If it did receive approval, other disposals could have been damaging to both firms' gas businesses. The EC, however, has already stated its approval of the transmission firm, saying it would encourage investment in networks.
Political proponents of the merger could claim that security of supply would be jeopardised unless the companies merged. Certainly, the two companies together would have made a larger gas-buying entity, balancing the power held by Russian gas monopoly Gazprom. However, Gazprom already owns 50% of Baumgarten, and both MOL and OMV have signed up to the Nabucco pipeline project that would diversify gas supplies to Europe away from Russia. It is difficult to see exactly how supplies would be in danger unless a merger took place.
Outlook and Implications
The adamant opposition of both MOL and the Hungarian government meant that OMV would have faced an extremely arduous—if not impossible—task in successfully completing a takeover of MOL. The numerous legal actions between the companies presented the prospect of costly, drawn-out court battles that would have no guarantee of success for OMV. With further doubt being cast on the value that would actually be accrued from a tie-up of the two companies by the EC's competition concerns, OMV is wise to now call an end to its pursuit of MOL by withdrawing its intended offer.
MOL, for its part, will certainly see the decision as a victory. The Hungarian company had voiced concerns over the potential loss of control and autonomy that could result from the takeover, particularly noting the Austrian government's minority stake in OMV. MOL will be happy to have retained its independence, but will now face the choice of whether to unwind some of its shareholding agreements and sell back its recently acquired shares in order to continue the company's regional expansion, or whether to retain its share control at the risk of stifling future growth. The conflict between OMV and MOL is also unlikely to be finished completely, as the two companies have been shaping up to compete against each other for a stake in Croatian oil company INA.
More broadly, the withdrawal of OMV's approach might be seen as a win for protectionism in the European market. The Hungarian government's efforts to block the move had prompted criticism from the EC, which saw the lex-MOL law as a breach of European Union (EU) rules on open markets. Despite the EC's criticism, in the wake of OMV's revocation, Hungary could well now see its response as justified, and indeed effective, as—while it may not have been the deciding factor—it no doubt contributed to making OMV's continued pursuit of MOL untenable. As such, the events have done little to discourage other EU countries from adopting a protectionist stance in their energy sector, and therefore provide a further demonstration of the ongoing challenges that the EC faces in encouraging an open, integrated European energy market.