OMV Abandons MOL Bid, Mulls Next Steps

UNCLAS VIENNA 001156

SIPDIS, SENSITIVE

E.O. 12958: N/A
TAGS: ENRG EPET ECON AU HU
SUBJECT: OMV Abandons MOL Bid, Mulls Next Steps

REF: A) 07 VIENNA 2980 and Previous; B) 07 Budapest 1618

Sensitive but unclassified - not for internet distribution.


1. (SBU) SUMMARY: Austria's flagship energy concern OMV is
abandoning a takeover bid for Hungarian counterpart MOL but will
retain a sizable stake for now. OMV posted record first-half
earnings and a positive outlook. While the bid was unlikely to
succeed -- given the opposition of MOL and concerns of EU regulators
-- its failure leaves no clear course for OMV to steer in a world of
giants. END SUMMARY.

MOL Takeover Bid: Ill-Fated from the Start
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2. (U) Launched in 2007, OMV's bid to merge with MOL was intended to
create a Central European energy champion (reftels) and garnered the
support of Austria's body politic but also the flat opposition of
MOL management and (apparently) Hungarian authorities (ref B). OMV
leadership announced August 6 that it would abandon the takeover bid
but retain its 20.2% stake in MOL for now; OMV is still suing MOL
over the latter's defensive tactics.


3. (SBU) The bid sparked concerns from competition authorities,
since OMV and MOL together would have a near monopoly on refining
facilities in parts of central Europe. In March, EU antitrust
regulators launched a probe into the hostile bid which said a
takeover would affect key markets for refined oil products and
natural gas in Central Europe; in July, a leaked EU report said a
merger "would remove MOL as the most significant" constraint on OMV
and "OMV as the most significant constraint on MOL." For instance,
the merger would combine all three refineries with the technical
capacity to deliver aviation fuel to Vienna International Airport.
For that reason, any merger would have meant certain divestiture of
key assets including some refineries and gas distribution facilities
(a price OMV was unlikely to pay). The takeover bid also came at an
awkward time for Europe's energy regulators, as high prices spark
demands for more aggressive oversight.


4. (SBU) Perhaps more importantly, OMV's hostile approach was out of
place in central Europe's de facto public-private energy
partnership. In a lunch with the Ambassador August 6, OMV board
member (and Raiffeisen International Bank CEO) Herbert Stepic
(PLEASE PROTECT) opined that the bid failed because it is impossible
to launch a major initiative in the energy sector against the will
of a country's authorities. Stepic commented that governments
around the world -- and not simply in Russia -- now expect to have
strategic control (explicit or implicit) over energy resources;
however well intentioned, OMV cannot impose itself against the
opposition of MOL and the Hungarian political class.

Record OMV Earnings and Positive Outlook
--------------


5. (U) On the same day, OMV announced record first-half earnings of
EUR 1.75 billion (up 63%),surpassing forecasts. CEO Wolfgang
Ruttenstorfer predicted that OMV's full year earnings would be
"robust" in part on the basis of strong revenues from Romanian
Petrom (acquired by OMV in 2004). OMV's share price spiked in
reaction to the earnings announcement and to the cancelled merger
bid (while MOL shares fell). Strong earnings and the share price
bounce will mollify the near-term impact on CEO Ruttenstorfer, who
was closely associated with the MOL takeover plan.

COMMENT: Back to the Drawing Board
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6. (SBU) Though poorly executed, OMV's strategy to create a $45
billion oil and gas champion in central Europe was a coherent
response to the Europe's challenges of energy consolidation and
dependence. OMV insists it will continue its "growth strategy in
central Europe" and Ruttenstorfer reiterated that market
consolidation will remain the sector's major theme, fueled by the
coffers of Russian giants Rosneft and Gazprom. The sizable OMV
stake in MOL may still give it some sway over MOL's future and will
play a role as the two companies compete to take over Croatian INA.
The failed bid leaves unanswered the question of how midsize
European groups like OMV and MOL will cope in an industry where
integrated giants and state-dominated firms control the lion's share
of energy resources. OMV and MOL may find themselves back in
discussions in the not distant future as both try to answer the
challenge of energy dependence on Russia and other foreign
suppliers.

KILNER