Twarted urge to merge

Industrial logic-some commixture of synergies and corporate survivalism-would appear to make an open-and-shut case for a full-scale, three-way merger among the leading regional oil and gas companies in central and eastern Europe, namely Poland's PKN Orlen, Hungary's MOL Rt., and Austria's OMV AG. Yet the formula that would fuse this trio together is stuck at the theoretical stage.

Industrial logic-some commixture of synergies and corporate survivalism-would appear to make an open-and-shut case for a full-scale, three-way merger among the leading regional oil and gas companies in central and eastern Europe, namely Poland's PKN Orlen, Hungary's MOL Rt., and Austria's OMV AG. Yet the formula that would fuse this trio together is stuck at the theoretical stage.

On paper, this hypothetical combine would, along with Slovakian refinery Slovnaft-in which MOL has a 32% stake-have "far greater geographical reach" and synergies in "pretty much all areas of the business," says Bidzina Bejuashvili, an analyst with European bank Raiffeisen Zentralbank Österreich AG.

In addition, a geographically dominant, unified company would be well-positioned in the region's oil products market at a time when European Union expansion means that securing supply is critical for companies fending off competition, especially from Russia. So a merger of some form should be a cinch.

Merger an eventuality?

It has proven otherwise, though not for lack of trying. At a briefing in London recently, none of the senior executives from these companies was willing to dismiss the eventuality of a merger. However, the press was shut out of discussions of PKN's proposal that a strategic three-way alliance be set up based on the sale of an 18% stake in the Polish company.

Both OMV and MOL avow an interest in vying for this slice of PKN, but only the Austrian company has the financial wherewithal to make good on its interest, MOL being burdened by debts of more than $1 billion and a loss-taking gas business.

Admittedly, OMV has its own difficulties in cementing the deal due to claims by Austria's main opposition party, the Democratic Left Alliance, that such a sale would threaten the security of the nation's energy supply.

National pride is also proving prohibitive to any merger or alliance arrangement because, as Bejuashvili notes, MOL and OMV each hope to claim the mantle of the leading regional entity alone, and "neither is willing to surrender its ambitions and consider a secondary role in the unified company."

Polish pressures

Most likely to twart current consolidation talks, oddly enough, are internal political pressures in Poland itself. The country's treasury minister, a vocal advocate of selling the PKN stake, is facing a vote of no-confidence in parliament-a sure delay to sale plans.

More problematically, Poland's reformed communist party, tipped to win the upcoming autumn elections, flatly opposes any deal that would cut to 10% the state interest in a company that controls three-quarters of Poland's refining market.

Still, the central and eastern European oil sector will not live or die by this merger deal. The commercial logic of privatization being applied to many of the old Eastern Bloc state oil companies will ensure the eventual cresting of a second wave of privatization of small regional companies now under way.

Here too, though, the demands of capital flow and investment continue to hamstring the likes of Romania's Petrom and Yugoslavia's NIS-as Croatia's INA DD hopes to finalize a privatization model by September aided by PricewaterhouseCoopers PLC and Deutsche Bank AG.

More in Refining