Interview with MOL Chairman Zsolt Hernádi

Posted: 01 May 2008   

by Neil Barnett    

Zsolt Hernádi, Chairman of Hungarian oil and gas firm MOL, sat down with CEPA Associate Scholar Neil Barnett in Budapest on April 25 for a conversation about the proposed OMV-MOL merger.

Last week, Hungary’s MOL held its annual general meeting (AGM). The privately-owned company has been fighting off a hostile takeover attempt by Austria’s national energy champion OMV since mid-2007. According to OMV chief Wolfgang Ruttenstorfer, the Austrian firm’s objective is to create a large regional energy company that can act as a bulwark against Gazprom’s westward expansion. Other observers suspect that a merger between the two firms would play into Russia’s hands.

OMV is already MOL’s largest single shareholder, having built up a stake of 20.2 percent. However, 80 percent of shareholders present at the AGM voted MOL’s way, striking down the majority of OMV’s proposals to join the two companies. The Austrian firm’s best hope now appears to be a decision from the European Commission’s single market directorate against defensive provisions in MOL statutes and Hungarian law. Still, there is no sign that such a decision is either imminent or likely to be implemented quickly.

Zsolt Hernádi is adamant on the need for defensive measures against a potential foreign takeover: “Strategic companies are as much a stakeholder business as a market issue. Just like the Porsche-Volkswagen takeover battle, an energy company has even more significant impact on society. It’s a stakeholder issue and a macroeconomic question, affecting security of supply for Hungary, Croatia and Slovakia (MOL’s main markets).”

Mr. Hernádi has little time for the “bulwark” argument: “[Mr Ruttenstorfer’s] argument is that the takeover of MOL would result in a big company. The two together can be worth 25 billion euros. That’s not very significant on the world scale,” Hernádi asserts. “If Mr. Ruttenstorfer wants to protect himself or anyone he should merge with Shell, BP or Exxon. But I doubt Exxon would welcome his takeover proposal.”

He continues, “this [proposed merger] is not consolidation because we work in the same markets so we would have to give up assets.” Indeed, should the merger go through, the Commission could in theory demand that some of the resulting company’s refineries be sold. With MOL’s refineries straddling Russian oil import pipelines, the natural buyer for such assets might well be Russian.

Revelations by Romania’s Evenimentul Zilei in recent weeks perhaps serve to underscore this possibility. On March 31, the Romanian daily published correspondence dating from late 2003 between OMV’s Ruttenstorfer and Alexander Medvedev, head of Gazprom’s export arm. According to these reports,the two companies discussed a possible joint bid for Romania’s Petrom, and an ownership arrangement whereby Gazprom would control Petrom’s gas business and OMV would essentially oversee the rest of the company. Though the joint deal in question never materialized, these reports raise questions about OMV’s possible collaboration with Russian firms as it seeks to merge with MOL.

Hernádi questions whether OMV is fit to take over its Hungarian counterpart. “Normally a takeover works because the buyer can make a higher return in the target company,” he says. “But MOL has the two most efficient refineries giving the highest returns per barrel in all of Europe. So by this rationale, if someone should make a takeover, MOL should take OMV. But we don’t want to kill competition in this way.”

Hernádi lays out his case for MOL’s regional and international superiority to OMV: “OMV has tried to acquire its biggest competitor (MOL) and failed. The reason they want to do this is that it’s their only path to growth, this is their story.”

“By contrast, in the last 12 months we bought a refinery in Italy. With [Czech energy utility] CEZ we created the region’s biggest electricity provider. Our partnership with the Oman Oil Company gives us access to significant upstream assets. We are now in talks with the government of Croatia to increase our holding in INA [the Croatian energy company]. We are building filling stations in Austria and we have initiated a plan for a regional gas network.”

MOL’s story, in other words, is a more dynamic one than that of OMV. At the AGM,  the company’s leadership secured a shareholder agreement for a buyback of up to 25 percent of the company’s stock, which could allow OMV a dignified exit. Hernádi insists, “we have to be prepared to offer OMV an exit that protects MOL shareholders from a drop in share prices. We have the possibility to buy back 25 percent of shares, but for now it remains an option.”

Should OMV lawyers pack up and leave, it’s important for the two companies to not burn any bridges. After all, they do have to work together in other areas. For instance, MOL and OMV remain partners in the planned Nabucco pipeline project, intended to bring Caspian gas across Turkey to Central Europe. Hungary’s government, meanwhile, has signed up to the rival Gazprom-led South Stream pipeline, although MOL has not. “We were always confident in Nabucco,” Hernádi says. “But the speed of it is not sufficient. I don’t want to blame anyone, but we’ve taken ten years already and all we have is a project company and feasibility studies.”

Pointing to the energy map of the region, Hernádi declares, “we desperately need alternative supplies. The pipeline that runs through Ukraine carries 150 bcm. What if something happens to that pipeline, even an earthquake? In Hungary, 90 percent of consumers heat with gas, we are heavily reliant on it. So in the prime minister’s shoes, yes I’d push like crazy for South Stream, Nabucco, LNG in Croatia and anything else that alleviates the situation.”

As credibility drains from OMV’s takeover attempt, the episode may have one important unintended consequence: to galvanise MOL’s determination to seize the title of regional leader in the energy business. The question, once OMV’s attempt is past, is how successful MOL will be in fending off bigger predators in the future.

Neil Barnett is an independent journalist based in Central Europe and an Associate Scholar at the Center for European Policy Analysis (CEPA).

The views expressed in this article are those of the author and do not necessarily reflect the opinions of the Center for European Policy Analysis.