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Viewing cable 06VIENNA1474, MAJOR MERGER IN THE WORKS IN AUSTRIAN ENERGY SECTOR

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Reference ID Created Released Classification Origin
06VIENNA1474 2006-05-19 11:30 2011-08-26 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Vienna
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#