OMV Presents Offer for MOL But Significant Hurdles Remain

Cards on the Table

Austrian oil and gas company OMV has tabled an offer for the outstanding shares in Hungarian counterpart MOL, formalising its previously stated intentions to merge the two companies to create a new central European energy giant. In a statement early this morning, OMV confirmed that it currently holds 20.2% of MOL and said it was now in a position to offer 32,000 forints (US$180) for each of the remaining shares. The company said it would make its offer in cash, although it said it was prepared to offer up to 25% of the consideration in OMV shares, and indicated that it had lined up the necessary financing to carry through the proposed transaction. OMV's offer, an 18.7% premium over MOL's share price at close of business yesterday, values the company at around 3.5 trillion forints (US$20 billion).

OMV's offer follows months of speculation and posturing between OMV and MOL, triggered by OMV's acquisition of an additional 8.6% stake in MOL in June. The acquisition, which boosted its holding at the time to 18.6% in total, was accompanied by an invitation to MOL's board to engage in discussions on future strategic co-operation. However, MOL immediately interpreted the move as hostile, rejecting any discussions on the matter and launching a still-ongoing programme of repurchasing its own shares to reduce any chances of an unsolicited takeover. Furthermore, the Hungarian government came out in defence of the country's key energy company, launching a legislative process to impose restrictions on foreign ownership of "strategic" economic sectors, including energy.

Today's offer by OMV will be construed by MOL and the Hungarian government as a validation of their actions. Indeed, these actions appear to have had the desired effect. In its statement, OMV indicated that "due to a number of technical impediments", it would be unable to achieve voting control of MOL at the present time. It listed these impediments as the current 10% voting restriction applied to shareholders in MOL's Articles of Association and the effective control of MOL's management of around 40% of the company's shares, via a series of control agreements with other shareholders. As a result, OMV stated, having presented its offer, it would now seek to engage in active discussions with MOL's independent shareholders in an attempt to build support for its bid and to remove the stated impediments to achieving full control of the group. While OMV also issued a further offer to MOL's board to engage in a constructive dialogue on combining the groups, its move has clearly indicated it will now seek co-operation from MOL's shareholders regardless of the support of the company's management. Until now, OMV has dismissed claims that its offer for the company was hostile. After today's statement, it can no longer argue that this is the case.

Outlook and Implications

OMV's declaration this morning is, in effect, a conditional offer for the outstanding shares in MOL. The company states that should the 10% voting restriction be removed and should MOL's control over its own shares be cancelled (or this impediment otherwise resolved in a satisfactory way), then its offer will only be conditional upon securing at least 50% control over MOL and on regulatory clearance from the European Commission (EC). OMV stated it has already issued an antitrust pre-notification to the EC to get this process under way.

OMV's actions have made it clear to MOL that, while its preference is to carry out a tie-up in a mutually co-operative fashion, it is prepared to pursue the deal whether or not it has the support of MOL's management. MOL's defensive response to OMV's interest so far means the latter is the more likely scenario. The completion of a takeover under such circumstances will certainly prove challenging, although not impossible given that MOL, despite its aggressing buy-back programme, still controls only a minority of the company's shares.

However, a potentially fatal obstacle still lies in the Hungarian government's opposition to the deal. With the government's hastily drafted legislation on foreign ownership in strategic industries looming over the transaction, OMV could find its carefully laid plans outlawed, taking the company back to square one. No doubt aware of this threat, OMV has offered a series of commitments to the Hungarian government designed to appease concerns over the potential loss of sovereignty over its strategic energy assets. These commitments include equal representation on the new group's supervisory board; pooling talent from both companies to form a new senior management team; locating the headquarters of the new group in Budapest; as well as a general undertaking to consider equally Austrian and Hungarian stakeholders. Should such an offer not be enough to gain the government's backing, OMV will surely be looking to the ultimate authority on cross-border mergers to support its plans. While it has yet to make comment on the matter, the EC will surely be taking a strong interest in the Hungarian government's legislative proposals which, at first glance, appear likely to breach European Unions laws on the free movement of capital. With MOL and the Hungarian government so adamantly opposed to OMV's plans, the Austrian company may find the EC to be its one and only ally.

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Hungary: 16 August 2007: Energy: Hungary: Hungarian Law on Foreign Acquisitions to Be Tabled This Month; MOL Outlines Expansion Strategy