Tales of a Takeover

For a while, it looked as though Austria was poised for a strategic marriage with Hungary reminiscent of its imperial past.  The oil and gas giant OMV, Austria’s largest industrial company and a leading European energy group, made a strong bid for the hand of its Hungarian counterpart MOL, and for a brief moment, it looked as if the alliance might come into being.

But brides-to-be have become  more willful these days, it seems, and this time, the suitor is finding that successful courtship takes more than just a pretty offer.

OMV AG, (Österreichische Mineralölverwaltung), officially launched its bid for its Hungarian rival, Magyar Olaj- és Gázipari, in June of this year, and though MOL executives continue to thwart OMV’s takeover efforts from every angle, the Austrians refuse to admit defeat.

And perhaps rightfully so. Analysts have predicted a merger of the two energy giants for years now, and it appears that the current jostling between the two may just mean a temporarily delay of the inevitable.

Regardless of the outcome, however, executives at OMV and MOL currently remain stuck in a vicious cycle of accusations and circumvention, and finger pointing across the Austrian-Hungarian border continues. And recently, due to the sensitive political nature of the issue – namely that both companies have strong national identities and control strategic assets – the discussions have moved beyond the boardroom.

After a meeting between top executives of OMV and MOL in mid June, a letter of intent was sent by OMV’s management to their counterparts in Budapest, outlining a cash offer that would give the former voting control over the latter. On Jun. 25, OMV representatives informed the press that it had increased its ownership of MOL from 10% to 18.6%, which OMV chief Wolfgang Ruttenstorfer claimed was an effort to "strengthen a strategic investment and pave the way for long term cooperation between the two companies."

Since that time, OMV has increased its ownership to 20.2%, which, according to a   report, Ruttensdorfer claimed had nothing to do with a "creeping takeover."

Executives of MOL saw things differently, and all OMV actions taken by since the letter of intent have been viewed as aggressive, skirting MOL’s wishes, and the seemingly "friendly" approach has now been labeled hostile.  In September, OMV released the plan to offer 32,000 Forint (€128) per share to gain the desired voting control, an attractive offer for stockholders. The offer represents a 43.6% premium on MOL’s May 29 previous share price of 22,290. This bid would value MOL at approximately €14 billion, and OMV claims to have secured bank financing to make the bid a financial reality.

But the offer comes at a price. Besides the lack of Hungarian enthusiasm, there are barriers between OMV and its desired voting control.  MOL’s Articles of Association include a 10% voting restriction, which would prevent any stockholder from gaining a voting majority.  In addition, the management of MOL holds an effective, if indirect, control of shares, established through "structural arrangements," a claim which, according to analysts, MOL executives have yet to refute. Due to this arrangement, individual shareholders would be denied the choice of accepting OMV’s offer without the board’s approval.

To back these claims up, MOL has repurchased up to one million of its own shares, according to financial market analysts, an action that directly or indirectly puts 40% of MOL shares out of OMV’s reach.  Representatives of OMV have labeled this protectionist move – which pused MOL’s stock price to an all-time high – as "irrational."  The official OMV offer therefore stands only if these impediments to voting control can be removed: Management control must be resolved, so that OMV could ultimately be granted its 50% control, and EU anti-trust officials must give the merger their blessing.

So while Hungary claims OMV is attempting a "creeping" takeover, MOL seems to be building an equally creeping defense.  Developments surrounding the conflict have kept it in the media spotlight over the last few months, and neither side seems willing to make a compromise.

Furthermore, interests outside of the companies’ headquarters have made the matter one of national and international political importance.  Hungary’s corporate watchdog, GVH, claims the merger would create an oil and gas monopoly in the region, and Hungarian Prime Minister Ferenc Gyurcsany officially called the takeover bid a hostile one, and an "injury to our national pride."

On the international scene, the issue has gone all the way to the European Union. After a brief debate in Brussels, EU Energy Commissioner Andris Piebalgs announced the EU would not take sides and that stockholders should determine the outcome. Austrian Foreign Minister, Ursula Plassnik strengthened the EU’s stance by stating that domestic politics should "stay out of it."

But while outside forces pressure MOL to put protectionist measures aside, its managers had other plans, and with backing from politicians, MOL’s executives have brought the case to the Hungarian legislature.  On Oct. 8, lawmakers overwhelmingly supported a bill protecting "strategic" companies from foreign takeovers, specifically those relating to energy and water resources.  The new legislation names several companies, including gas, electricity and nuclear plants, but the law seemed so obviously targeted at OMV’s attempt to take over the Hungarian rival that it was dubbed "Lex Mol."

The new law, which sets a 75% voting limit for shareholders to unseat the MOL’s board, is criticized for violating EU standards for free capital flows, and may yet be overturned in Brussels.

Until that happens, however, the issues raises many questions concerning the ownership of strategic assets within EU states. While energy companies are important to national identity, protecting these companies from other EU nations, even from ‘hostile’ corporate takeovers, should no longer threaten security. Given that EU regulations will continue to ensure the free movement of capital and goods, such protectionist rhetoric might seem to be a thing of the past.

However, EU lawmakers may promote consolidation of ‘strategic’ companies within its borders in order to create energy security for the larger European region, particularly in the light of Russia’s recent aggressive tactics. The creation of a Central European energy giant, large enough to fend off takeover attempts by Russian Gazprom and Lukoil could, analysts say, potentially give the EU more energy independence.

The question remains, though, as to how useful such protectionist measures, whether national or regional, are in today’s world.  OMV and MOL do not operate in an isolated context. Even as the Austrian state remains the largest shareholder of OMV with its 31% stake, foreign interests have long stakes in the company’s affairs. State-controlled investment funds in Abu Dhabi have a 17.5 % share of OMV, and the company has been negotiating with Russia’s Gazprom for some time. During a visit by Russian Energy Minister Viktor Khristenko last Summer, Austrian politicians reportedly ‘jumped’ at the opportunity to team up with the Russian oil company in a new pipeline that would rival the EU-backed Nabucco line.  Further, critics of OMV’s takeover attempt claim that the true motive behind it is a desire to sell off Hungarian refineries to Russian concerns in order to buy more assets in Siberia.

From the Hungarian side, there seem to be similar motives that would contradict the ‘national security’ claim.  According to a Financial Times report last summer, MOL’s executives ridiculed OMV’s takeover attempts: If they wanted a partner, they would ask global giants such as Shell, BP, or Gazprom, not their smaller Austrian rival.

Some find the Hungarian position self-defeating: Both companies have pursued consolidation efforts in the Central and East European region – MOL, for example controls Slovakia’s Slovnaft, and OMF has a majority stake in Romania’s Petron – and their combined resources would create an energy group large enough to fend off larger global competitors. A merger could also result in more efficiency and the materialization of projects that have been put aside. Plans to connect the Druschba pipeline, which brings Russian oil to Europe, with Adria-Wien pipeline, which brings raw oil from Trieste to Vienna – originally planned to be finished by next year – have been put off for unknown reasons. Certain sources claim that if OMV and MOL were one company, this plan would have long been realized

So why the resistance? Hungary may simply be wary of Austria’s historical dominance. Other claim that OMV is pre-empting a similar move from MOL, by many accounts the more efficient of the two companies, with higher production capacities at its various refineries and a more successful record of consolidation efforts in Central and Eastern Europe. While OMV overall profits still exceed those of its Hungarian counterpart, it may be only a matter of time before MOL executives make OMV shareholders an offer they can’t refuse.

Still other critics assert that the current jostling and posturing are mere efforts to retain and consolidate power amongst OMV and MOL board members.  Both companies have strong political ties to their respective governments and some see OMV as a ‘training ground’ for the future political elite in Austria, but it goes both ways. Current CEO Wolfgang Ruttenstorfer, for example, was once  state secretary at the Ministry of Finance,  and several current politicians held high positions at OMV before entering the political arena in Vienna.  On the other hand, Hungarian politicians supposedly received large monetary donations from MOL’s highest-ranking executives in return for state backing in protecting their comfortable positions.  More business as usual than an issue of national pride, or the promotion of a liberal free market.

In the end, MOL’s defences may all be in all in vain. On Oct. 24, the European Court of Justice overturned a 47-year-old German state law that essentially protected Volkswagen against a takeover by its rival automobile manufacturer, Porsche. The new legislation states that no shareholder can own more than 20% of voting rights, regardless of the size of their stake in a company, making MOL management’s 40% stake impotent to the ultimate wishes of other shareholders. This decision overturns a time-honoured European practice of shareholding, and may make Hungary’s Lex Mol die an early death.

So far, MOL maintains that the takeover attempt by OMV has been a ‘failure.’ And OMV says an even higher bid can’t be ruled out. So the battle continues, and nationalist sentiment continues to resist market forces, at least for now.