VZCZCXRO8610
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVI #1156 2251217
ZNR UUUUU ZZH
R 121217Z AUG 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 0762
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

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 
------------------------------------------ 
 
¶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 
---------------------------------- 
 
¶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