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IdentifierCreatedClassificationOrigin
06VIENNA1474 2006-05-19 11:30:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Vienna
Cable title:  

MAJOR MERGER IN THE WORKS IN AUSTRIAN ENERGY SECTOR

Tags:   ECON EFIN EINV ENRG EPET AU 
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VZCZCXRO0670
RR RUEHAST
DE RUEHVI #1474/01 1391130
ZNR UUUUU ZZH
R 191130Z MAY 06
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 3554
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RHEBAAA/USDOE WASHDC
					  UNCLAS SECTION 01 OF 03 VIENNA 001474 

SIPDIS

SIPDIS, SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG EPET AU
SUBJECT: MAJOR MERGER IN THE WORKS IN AUSTRIAN ENERGY SECTOR


VIENNA 00001474 001.2 OF 003



SUMMARY
-------



1. (SBU) The Austrian oil and gas giant OMV and Austria's
leading electricity provider, Verbund, announced on May 10
their intention to form a new company, OMV-Verbund, by the
end of 2006 or early 2007. The GoA, which holds a 51% share
in Verbund and a 31% share in OMV, has blessed the merger.
However, there is resistance from Austrian state governments
and their energy providers, which have a significant stake
in Verbund. Analysts have questioned whether the strengths
of OMV - oil exploration and trading and the strengths of
Verbund - providing electricity - would produce significant
synergies. OMV and Verbund point to the growth potential in
Southeastern and Eastern Europe as the motivating factor
behind the merger. The prospect of creating a national
energy champion, capable of competing on a European level,
was probably the primary reason for opening merger
discussions. OMV and Verbund have also most likely followed
closely Gazprom's recent interest in acquiring
infrastructure and downstream facilities in Europe. End
Summary.


CREATING AN AUSTRIAN ENERGY GIANT


--------------------------





2. (U) The Austrian oil and gas giant OMV and Austria's
leading electricity provider, Verbund, announced on May 10
their intention to merge by the end of 2006 or beginning of


2007. The merger would create a new energy company, OMV-
Verbund, able to compete on the European level. The merged
firm would have market capitalization of approximately $38
billion, total sales of $23 billion, and rank twelfth among
European energy companies in terms of market capitalization.



3. (U) OMV is currently the largest oil and gas company in
Central Europe. Verbund covers half of Austria's
electricity needs, and generates half of its revenues
abroad. The most likely outcome is an OMV takeover of
Verbund. Pursuant to the provisions of the Austrian
Takeover Act, OMV will issue an offer to the minority
Verbund shareholders, i.e., the 49% non-government portion.
Verbund shareholders can either sell their shares for 20%
above the average rate of the past six months or buy 6.5
newly issued OMV-Verbund shares for one Verbund share.


GOVERNMENT REACTIONS


--------------------------





4. (U) The federal government controls 31% of OMV shares
and holds 51% of Verbund's shares. A constitutional law
requires the government to maintain a majority stake in
electricity providers. However, the two large parties, the
ruling center-right People's Party (OVP) and the opposition
Social Democrats (SPO), have agreed to pass legislation
amending this requirement, thus ensuring the two-thirds
majority necessary for a constitutional change. Finance
Minister Karl Heinz Grasser and SPO shadow Finance Minister
Christoph Matznetter have also stated that the GoA should
retain at least 25% plus one share (blocking minority) in
the new company to guarantee Austria's "energy supply
security."



5. (U) Minister of Economy Martin Bartenstein expressed
support for the merger, claiming it would "create an energy
player with European dimensions." Joerg Haider, leader of
the junior partner in the government coalition, the Alliance
Future Austria (BZO), criticized the planned merger as "a
sell-out of Austria's hydropower sources." Haider cautioned
that renouncing the government's majority in Verbund would
be a breach of the coalition agreement between the OVP and
BZO.


MERGER NEEDS SHAREHOLDER AND EC APPROVAL


--------------------------





6. (U) The Abu Dhabi-based International Petroleum
Investment (IPIC), which owns 17 percent of OMV, has already
blessed the deal. The IPIC's Managing Director told the
press it was good business to combine gas production with
electricity generation given growth in demand. With 45% of
the shares of OMV-Verbund, OMV and IPIC hope this will deter
any takeovers attempts from other energy giants.



7. (U) There is some resistance to the merger from Austrian
state governments and their electricity providers who hold
significant shares (nearly 30%) of Verbund. These providers
are demanding more information about the putative synergy

VIENNA 00001474 002.2 OF 003


effects of the merger, before agreeing to the merger. On
May 17, the influential governor of Lower Austria, Erwin
Proell, weighed in, agreeing with Haider's call to convene a
special governors' conference the week of May 22 to discuss
the merger. In apparent reference to IPIC and the
possibility of a foreign takeover, Proell declared that
Austria's hydropower should not become "a plaything for
international speculators." Despite these concerns, the
state governments, as minority shareholders in Verbund,
cannot stop the merger, if the SPO and OVP waive the federal
government's majority share.



8. (U) The head of the Austrian Competition Authority
(ACA), Walter Barfuss, confirmed that the European
Commission would need to approve the merger. Barfuss stated
that he expects the EC to approve the deal with conditions.
He added that the core business operations of OMV and
Verbund are different, but he noted that there is some
concern the merger might decrease competition in the energy
sector.



9. (U) Apparently unrelated to the merger discussions, EU
Antitrust authorities, in cooperation with the ACA, carried
out an unannounced search of OMV's gas division on May 17.
According to EC officials, the searches at OMV and several
other major European gas companies stemmed from allegations
of competition abuses, particularly restricting access to
grids.


LACK OF SYNERGY BETWEEN OMV AND VERBUND


--------------------------





10. (U) Analysts expressed skepticism concerning the
synergies that could develop as a result of this merger,
because the gas business is not the main activity of either
company. Combining OMV's strengths - oil exploration and
trading crude oil and oil products - with Verbund's forte -
providing electricity - would not necessarily yield
noticeable benefits.



11. (U) The Vienna Stock Exchange reacted negatively to the
merger discussions. OMV shares have lost 16.2% since May
10, although the drop coincided with the announcement of
lower than anticipated first quarter earnings. Verbund
shares have lost 1.7%, although the stock has been very
volatile.


THE FUTURE LIES IN GAS TRADE IN THE EAST


--------------------------





12. (U) In a joint press conference, OMV Chairman Wolfgang
Ruttenstorfer and Verbund CEO Hans Haider pointed to the
enormous growth potential of the new company as the real
motivation behind the merger. Both companies view
Southeastern and Eastern Europe as targets for expansion and
increased investment. OMV has methodically built up
cooperation with partners in the region, including its 2004
acquisition of 51% of Romania's Petrom and its recently
concluded purchase of 34% of Petrol Ofisi, Turkey's largest
gas station network. In cooperation with Italian partners,
Verbund is planning to construct a gas power plant to access
Libyan gas. It also runs a huge hydropower plant in Turkey.



13. (SBU) Analysts opined that the main driving force
behind the merger is to create an Austrian energy company
able to compete with larger energy giants - Germany's EON
and, especially, Gazprom - in East and Southeast European
markets. OMV's planned Nabucco gas pipeline from Turkey to
Europe would also support the strategy of becoming a major
player in the region. Verbund could use the Nabucco gas to
fire power plants in Austria and Eastern Europe. Austrian
press also highlighted the Russian-Ukrainian gas price war
in January, emphasizing that "size matters" when a
contractual dispute arises.


COMMENT


--------------------------





14. (SBU) The press and analysts have speculated for years
about a possible merger of Austria's leading oil and
electricity companies. However, it was never a given, as
the business interests and the enterprise cultures of OMV
and Verbund are indeed quite different.



15. (SBU) Politically, the OMV-Verbund would create a new
Austrian energy champion, capable of competing on a European
and global basis. OMV and Verbund undoubtedly have viewed
closely Gazprom's unabashed interest in acquiring
infrastructure and downstream facilities in Europe. Given

VIENNA 00001474 003.2 OF 003


these considerations, the GoA most likely decided that a
reduction in government control of the energy sector was
preferable to the possibility of increased foreign
competition.

PHILLIPS#