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Central Europe: Stand-off in PKN and Mol merger

IN KEEPING with the on-off nature of a proposed merger between Poland's PKN Orlen and Mol, of Hungary, conflicting signals emerged in February over whether the process will begin. On 25 February, PKN said it had chosen Lehman Brothers and CA-IB Securities, a division of Bank Austria, to advise it in merger talks with Mol. Observers see such a move as a crucial step to getting a deal done.

However, this news contrasted with statements made by officials in the previous week. Maciej Gierej, the chairman of PKN's supervisory board and head of Poland's fuel-sector privatisation agency, said on 18 February that there had been little progress in the talks, which were stalled at the level of 'general conceptions'.

And on 23 February, the Polish finance minister, Zbigniew Kaniewski, said the country is considering not merging state-controlled PKN with Mol, because the polish firm 'had received signals from other fuel groups that would be interested in co-operation agreements'. He refused to name the other interested parties.

Mol and PKN have been locked in talks about a possible merger since signing a memorandum of understanding on strategic co-operation and a possible merger in November. The merger process was planned to start with a cross-shareholding of 10-15%, followed by joint ventures in some activities, culminating in a merger within three years.

The two firms have been circling each other for longer than that.

Over two years ago, executives from Austria's OMV, PKN and Mol advertised the benefits of closer co-operation to overcome local demand swings, cut costs and defend against the encroachment of Western and Russian majors. Nothing much happened until November.

Sebastian Slomka of BDM PKO, a Warsaw brokerage, claims the comments by Kaniewski and others could be a negotiating tactic by the government to turn up the heat on Mol. 'I read Kaniewski's words as an attempt to put pressure on Mol to do a deal,' he says.

Experts suspect Mol may be holding out for better terms. Certainly, it looks the better prospect on paper. It has led the way in the regional consolidation process, buying firms in Slovakia and Croatia, and setting its sights on fuel-sector champions in the Czech Republic and Romania. Conversely, PKN has long talked of regional fuel-sector consolidation, yet, to date, has done little to make it a reality.

Of particular concern to Mol is the lack of restructuring at the Polish firm. Through limits on voting rights, the Polish state effectively controls almost 28% of PKN's shares. By contrast, Hungary's privatisation agency sold a further 10.5% of Mol on 20 February to bring the state's holding down to 12.2%.

Nevertheless, the international rating agency, Fitch Ratings, in a statement reaffirming PKN's BBB rating on 25 February, said the positive aspects of this potential merger are clear—larger economies of scale, cost synergies and regional diversification.

However, it said it is keeping the outlook on the rating 'negative' because the execution risk of the merger is high, 'given the complexities and political sensitivities involved'. Fitch also highlighted credit concerns at PKN, which include the slow restructuring of the group, relatively high operating costs, the increasingly competitive domestic fuel market and the company's short-term debt profile.

Furthermore, PKN's debt problems are likely to worsen if it becomes involved in the consolidation of the region's oil sector. 'PKN's debt-funded acquisitions of stakes in other regional players may deteriorate its financial profile, while the integration of acquired assets and achievement of cost synergies may be a lengthy process,' Fitch says.

This would be especially so if PKN is eventually involved in the privatisation of the Czech Republic's largest oil company, Unipetrol.

PKN is on the short list to buy a 63% stake in Unipetrol, along with Royal Dutch/Shell and Mol. A final decision from the Czech government is expected in at the end of April.

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