Under the deal struck in early November, E.on will pay EUR 775 million for 75 percent of MOL’s gas trading and storage units and 50 percent of its gas importer, subject to regulatory approval. MOL also received an option to sell the rest of those companies plus 75 percent of its gas transportation business, altogether worth up to another EUR 1.4 billion.

“This gives us a lot of flexibility,” Hernádi says with obvious understatement. “If you look at our gearing now, it’s more than healthy.”

Regional battle for supremacy

With more than EUR 2 billion burning a hole in his pocket, Hernádi is now positioned to make the next move in a regional battle for supremacy being waged by MOL with Austria’s OMV and Poland’s PKN Orlen. Each envisions itself as the potential champion in a fast-growing market of more than 100 million consumers stretching from the Baltic Sea to the Balkans.

Moreover, say some analysts, this is not just a battle for a greater or lesser share of the profits. In the long-term, it may be a battle for survival. “Because of the structure of the downstream oil business, this is a winnertake-all fight,” says Tamás Pletser, regional energy analyst at Erste Bank.

All three companies have made significant moves this year. The most daring came in July when OMV agreed to buy a majority stake in Romania’s state-owned oil company, SNP Petrom. OMV paid EUR 1.5 billion and agreed to invest another EUR 300 million annually over the medium-term.

In capturing Petrom with its two refineries and 600 petrol stations, OMV is all but assured of reaching its 2008 goal of controlling 20 percent of the refining and retailing market in the countries that straddle the Danube from Austria to the Black Sea. Petrom also boosted OMV oil production to 350,000 barrels per day.

Romania on the horizon

A country of 21 million that is just beginning to put its economic house in order and will likely join the European Union by 2007, Romania holds great potential for OMV. But Petrom is also a serious risk. The deal does not exactly stretch OMV to its financial limits – a EUR 1 billion convertible bond issued to help finance the purchase left OMV’s gearing (debt to shareholder capital) still below 20 percent. But transforming Petrom from what is essentially a sheltered, bloated backwater into an efficient player in a now liberalizing market, will test OMV’s management for the next three-tofive years.

Until the Petrom deal, MOL has gotten the better of OMV in regional acquisitions. MOL bought Slovakia’s Slovnaft in 2000 and last year took 25 percent of INA, Croatia’s state-owned oil and gas company. MOL paid USD 505 million for that stake and is still struggling to gain a majority holding. MOL has preferential rights on any further sale but Croatia’s government has been dragging its heels knowing that layoffs will follow MOL’s full takeover.

HUNGARY’S MOL is in a regional battle with Austria’s OMV and Poland’s PKN Orlen to become leader in a market of more than 100 million people stretching from the Baltic Sea to the Balkans.

A matter of time

Hernádi though, is confident that control of INA is only a matter of time. INA needs investment to be competitive in the region, he says, and the EU, to which Croatia is applying for membership, will push the government to stop sheltering the company.

Assuming Hernádi is right, that still leaves him with plenty of cash left from the gas business sale. The big question for MOL then, is whether they can put it to better use than simply giving it back to shareholders. Hernádi thinks MOL can.

In November, MOL bought Shell’s Romanian network of filling stations along with its associated retail and wholesale fuel and lubricant business for a reported USD 20-25 million. Together with INA, MOL is also bidding for Energopetrol, a Bosnia oil and gas company 67 percent owned by the state. OMV are reportedly also interested.

Further expansion

Other potential targets in the region include Serbia’s NIS, slated for privatization in the next two-to-three years, and Rompetrol, a privately-owned refiner and retailer in Romania. OMV is in the process of selling a 25 percent stake in Rompetrol, a condition of its Petrom purchase. Finally, MOL is looking to invest more in its upstream holdings, an area where it lags OMV.

Still, none of the above would constitute a serious threat to OMV. That could, however, come by joining forces with PKN, the dominant company in the region’s largest single market.

PKN, like MOL, has made great strides in modernizing its operations and streamlining its organization. But already PKN’s management admits the company lacks the scale to survive as an independent. That spurred the company to initiate merger talks with MOL earlier this year. The talks went nowhere.

Merger unlikely

The problem, says Gergely Várkonyi of ING Bank in London, is that MOL shareholders would likely consider an even merger unacceptable, but PKN – and the Polish government, which holds a sizeable minority – looks now to be unwilling to settle for anything less.

Eventually, the Polish government will sell its shares in PKN, which are already listed. That may remove much of the obstacle to an uneven tie-up, but by that time, the price will also have gone up. PKN, finally getting into the acquisition game itself, has just finalized the purchase of Unipetrol, the Czech oil company, after beating out both MOL and OMV in the bidding.

And so the struggle continues for the CEE oil and petrochemicals industry. The ultimate irony, though, may await the company that emerges as champion.

Once the market is tidied up and mostly concentrated in one or two groups, a truly global oil player might finally find the region interesting enough to buy its way in. “In my view they two to four years to join forces before an investor, either from the East or from the West, appears,” say Erste Bank’s Pletser.In that case, the biggest prize will go to the shareholder who bet on the right horse.