beyondbrics

Poland’s government is becoming increasingly fond of “privatisations” that see state-owned firms sold off to other companies controlled by the government – a way of using sale proceeds to bolster the budget while keeping control of important parts of the economy.

Now Mikolaj Budzanowski, the new treasury minister, has told Puls Biznesu newspaper that Lotos Group, the country’s heavily indebted second largest refiner, may end up being sold to a Polish energy company.

“Lotos needs a strategic investor, but given the lack of foreign interest, we are left with a choice of companies from the domestic fuel industry,” he said.

“There are not that many local fuel companies, so the choices for a consolidation scenario are limited,” he added.

The likeliest choices for a takeover of Lotos would be either PKN Orlen, Poland’s leading oil company, which has been touted as a possible partner for Lotos for the past decade, or PGNiG, the local gas monopoly.

In the interview, Budzanowski said he did not want to create an energy monopoly in Poland – which on the face of it would make a marriage of PKN and Lotos problematic.

A local merger isn’t being greeted with much enthusiasm by analysts. This from Robert Rethy, an analyst with Wood & Co, a central European investment bank:

As we have commented before, a PGNiG-Lotos tie-up may lead to the most suboptimal ongoing scenario for the Polish oil & gas sector for minority investors. We believe it would represent a suboptimal allocation of resources in the sector and, ultimately, may lead to value destruction at all three entities directly or indirectly involved. The only potential beneficiary of such a consolidation would be Lotos, which would gain balance sheet support, and its existence would be further guaranteed in its current structure.

While minority shareholders in Lotos may come out ahead, PGNiG would have to diversify away from gas and into oil. Rethy thinks that could add $2bn to its balance sheet – this at a time when the company is already being hit hard by soaring gas demand and a refusal by Polish regulators to allow price hikes that would enable it to reduce trading losses.

PKN is also weighed down by its own debt, in part thanks to its troubled acquisition of Mazeikiu, a Lithuanian refinery.

Markets punished both PKN and PGNiG on the news – each company fell by 1.6 per cent in trading on the Warsaw Stock Exchange on Tuesday afternoon, while Lotos shares jumped by 2.6 per cent.

Lotos is staggering under the 6.9bn zlotys ($2.1bn ) of debt – of which about $1.5bn is in foreign currency – that it acquired to modernise its refinery and to invest in upstream production. The company reported revenues of 20.8bn zlotys and a net profit of 560m zlotys for the first three quarters of last year – a 30 per cent increase in profits over the same period in 2010.

Despite the modernisation programme, the Polish government faced an uphill battle in trying to sell the company at a time when there is a glut of refiners on the European market.

The only people who expressed any interest in the company were Russian oil companies, but the thought of selling a strategic company to Poland’s old imperial master caused political problems for the government.

In the end, the treasury, which controls 53 per cent of Lotos, received no binding offers for the company by the end of last year, and was thinking about floating Lotos on the Warsaw Stock Exchange.

Budzanowski’s musings suggest the government is opting for the safer alternative of selling Lotos while also keeping it.

Related reading:
Poland: the awkward Lotos position, beyondbrics
Eurozone turmoil hits Poland’s privatisation plans, beyondbrics
Polish privatisation: Have your cake and eat it, beyondbrics