Published in Nacional number 354, 2002-08-28

Autor: Berislav Jelinić

Privatization of the largest Croatian oil company

Five candidates in the sale of INA

OMV from Austira and MOL from Hungary are the most serious candidates

“The Croatian government will not finalize the privatization of INA during this mandate. Even today we can say this with great certainty, even though last week’s entry of Russia’s Rosneft into the INA data room formally marked the beginning of the due diligence process prior to the submission of the binding bid for the purchase,” was the comment made for Nacional by two businessmen close to the international oil business.

After the government selected the five candidates in the INA privatization, last week's entry of Rosneft's experts into the INA data room began the process of due diligence prior to the submission of the final bids. The privatization of INA prior to the upcoming elections will not happen primarily due to the fact that INA’s future owner will have to quickly layoff at least 5000 staff, and seriously restructure its operations in order to make the company profitable in the long term.

Considering that this move by the new owner will arouse great social protests from the workers, the current government will certainly not allow that social fury to be released this close to an election campaign.

There have been some estimates that INA will be privatized in the first quarter of 2003 at the earliest and it is very possible that this could be postponed until the fall. By that time, the governing coalition and the opposition will be well into election preparations, and international circles have assessed that this could jeopardize the position of INA’s future owner.

The new owner of INA could in such a case be faced with the possibility of a new coalition government, under great pressures that thousands of workers threatened with the loss of their jobs will slow down the INA privatization process and seek new terms in the sale. Which is why the final privatization should be held off until after the next parliamentary elections.

Too close to an election

The governing coalition is also aware of this problem. However, sources close to the government claim that this privatization could be finalized earlier if the governing elite assess that the money obtained from the sale, between $1-2bn could be used to increase the salaries of a significant portion of the voting body.

In that case, cold hard math will determine the outcome: better to have several hundred thousand workers with higher salaries, albeit temporary, than five to seven thousand layoffs which in spite of mandatory severance could arouse dramatic social pressures.

These are not the only troubles the government and INA are facing during the privatization process.

Edison Gas backs away

Nacional learned last week from sources close to INA that Edison Gas, one of the five final candidates, will not enter into the due diligence process in INA. That company failed to receive consent from its majority owners, Gaz de France and Edison, to independently represent the consortium which is nominally bidding for INA. Considering that their time slot for the seven day due diligence is drawing near, the opinion in INA is that Edison Gas will not even participate.

That brings the number of candidates down to four.

At this moment, it is difficult to assume just how serious a candidate Russia’s Rosneft is, even though Societe Generale, their financial advisor for the INA sale, brought in 51 experts to analyze INA’s books last week.


Though Rosneft is not Russia’s largest oil company, it invested $600m in various projects throughout the world last year. Its majority owner is the Russian government, and the company was founded as a joint stock company on September 29, 1995 by resolution 971 of the Russian government. Its director is Sergei Mikhailovich Bogdanchikov, and a dozen of Russia’s top state officials sit within the company’s management. It is currently unknown just who is lobbying for Rosneft’s interests in Croatia. They have hired the law firm Allan&Overy from London as their legal representation, and that company has retained several local lawyers to help with the legal issues.

It is relatively uncertain just how serious a contender Lukoil is. This is Russia’s largest oil company and applied to the tender as the leader in the consortium Lukoil & Latsis Group. Lukoil operates in 40 Russian regions and 25 different countries, with a total of 130,000 staff and over 2,600 petrol stations. This company has one of the world’s largest oil reserves. However, Lukoil is not planning any further expansions abroad, and is planning to instead focus on consolidation of assets acquired over the past few years.

“For the time being we will concentrate on increasing production in Russia and in the former Soviet Union, and in distribution we will direct ourselves to assets located along the corridors for our oil – Eastern Europe, the Mediterranean and the U.S.” was the comment made two weeks ago for Reuters by Lukoil director Vagit Alekperov.


Thus, it can be legitimately assumed that Lukoil will not fight a fierce battle in the competition for asset acquisitions in Croatia, Greece and Poland, where they have submitted offers for controlling stakes in three companies. Proof that they are in no hurry with their investments is in the development of events in Poland, where Lukoil recently reconsidered and backed away from the joint purchase of the Refinery Gdansk SA together with Rotch Energy Ltd from Britain, in an attempt to purchase the company on its own.

Due to these reasons, the most likely candidates in the INA privatization are OMV from Austria and MOL from Hungary. This, however, could prove to be very awkward for the government since there is still no reliable information indicating how each of these companies will act during the sale. Nacional has learned from sources close to both companies that there is some serious though being given to a joint purchase.

This has been among the options considered since the two companies of late have had a fairly interesting business relationship, which can be characterized at times as very friendly ending in a possible merger, while at other times as very hostile, such as in the time when OMV bought 10% of MOL in a hostile takeover. These two companies are in the midst of a great regional battle, and are aware that only one can have a real shot at survival on the global oil market before later being swallowed up by one of the true oil giants. One such conflict was at the time when both companies were vying for the purchase of the Polish oil company PKN due to their plans for regional expansion.


In this situation, it is impossible to exclude the possibility of a later merger between OMV and MOL. The government should pay special attention to how these two companies will conduct themselves in the INA sale, as they could enter into the bidding with a joint tactic to lower the price, particularly if both companies enter into the final round.

The government should pay special attention due to the specific situation in which the remaining candidates for the INA sale are nominal, thus leaving OMV and MOL as the only serious buyers.

Such a turn of events could have very undesirable political consequences for the governing coalition. Nacional commented in 1999 on the failed merger between INA and MOL and the conflict between the technological managers and the radical right wing faction in HDZ, which supported both MOL and OMV in those proceedings. The merger of INA and MOL was supported by the managerial faction of HDZ, led in name only be Davor Štern, though in fact under the leadership of Franjo Gregurić. This transaction, which was compromising for the government at the time because it undermined the tender issued for the sale of the natural gas component of INA, to which the German Ruhr Gas, Italian SNAMENI and American ENRON submitted their offers. The transaction was halted by the right wing faction of HDZ led by Ivić Pašalić after OMV submitted its written offer in the INA sale to Premier Zlatko Mateša and to the Office of the President on October 12, 1999.

Since that time, OMV and MOL have had good relations with the opposition, whose influence on the financial flows in the state, not to mention political weight, could further strengthen if one of those two companies succeeds in the end to buy INA. This refers primarily to Marijan Kostrenčić, who together with the company Intel is the local legal advisor for OMV.

This would be particularly defeating for the coalition government, especially since the influence of the right wing, due to Račan’s political nonantagonization, has not diminished in the least over the important financial transactions. Under these circumstances, it truly is difficult to predict just how much the state will earn from the INA sale.

Today, INA employs 17,000 people. Last year, the company produced 2 million tons of crude oil and 1.8 million cubic meters of natural gas, while 4.8 billion tons of crude oil were processed. INA possesses 450 petrol stations in Croatia and abroad, and the government is trying to please the company in various ways. After financial reconstructions rendered a profit of 353 million kuna, the state also permitted INA to continue selling petroleum products below European standards until January 1, 2006. These were all steps made to help achieve an even better selling price, though it is difficult to speak concretely about the selling price as speculations place the amount between $1 and $2bn. In any case, this is too great a figure to have the decision concerning this transaction deprived of small political interests of the varying political options. Who will profit most in the end will likely be seen only after the next elections.

Remaining phases in the INA privatization

After the participants complete the due diligence proceedings, the expert teams of each company will meet with an expert team from INA. Following this, the INA administration will meet with the administration of each company, after which point the companies will submit their final and binding offer consisting of both the financial and technical sections. The technical section will outline the company’s vision concerning the future management of the company, investment plans and such. The financial segment will regulate the means of transferring shares to the new buyer. Once the government receives the final bids, they will select the candidates to enter into the final round. At this point, those final candidates will be given further insight into the company’s operations and will receive access to the black lining information which was kept confidential during the due diligence proceedings. For example, in the first phase of due diligence, the candidate can learn of INA’s reserves, but not the drilling terms or discounts the company receives for oil transport. In the first phase, they can also learn about the existence of debts, but not all about the terms of those debts.

In the final phase of negotiations, the government will hold parallel talks with the most serious candidates to discuss the Contract for shareholders and the Contract of sale. Following this, the INA expert team will discuss the modality of the future corporate cooperation between INA and its potential future owner. This process, theoretically, could be completed by Spring 2003 at the earliest.


MOL is the largest Hungarian company in terms of net turnover. It is the only oil processor in Hungary and the only company with a permit for the wholesale and distribution of natural gas.

MOL was founded in 1992 by the merger of 9 Hungarian oil and gas companies which until that point were operating under the state consortium OKGT. As of 1995, MOL stocks are traded on the Budapest and Luxemburg exchanges, as well as on the London SEAQ. Today, there are 23 companies in the MOL group, with 16,000 employees. The largest members of the MOL group, besides MOL itself, are the Slovakian company Slovnaft, in which MOL is 36% owner, and the Hungarian petrochemical company TVK, in which MOL is 34.5% owner.

In the first half of 2002, the net profits grew to EUR 161.74m compared to the losses endured in the same period in 2001, which totaled EUR 19.20m. Thanks to favorable market conditions and a strong domestic currency, MOL increased its net profits fourfold over the 2001 second quarter to EUR 120.08m.

Foreign institutional investors 46.1%
OMV 10%
Foreign private investors 0%
APV Rt. (Hungarian state privatization and holding company) 25%
Hungarian institutional investors 4.8%
Hungarian private investors 0.4%
Depositary shares 13.1%
MOL rt. (treasury shares) 0.5%
Unregistered shares 0.1%


Lukoil operates in 40 Russian regions and 25 countries throughout the world, with a total of 130,000 employees and over 2,600 petrol stations. It boasts one of the largest oil reserves in the world.

According to information published in the “Interim consolidated financial statement”, Lukoil closed the first quarter of 2002 with $2.84bn earnings from sales, which is less than the $3.33bn achieved in the same period the year before. The total cash flow from operative activities in the same period totaled $243m compared to the achieved $680m in the same period one year earlier. In the first quarter of this year, Lukoil invested $605m, down $279m from the investment figures in 2001’s first quarter. The decreased earnings are seen in other accounting sections, while auditors consider this to be a short term trend which will not significantly impact the company’s operations at the annual level.

96.2% of the stock is Russian owned: 7.6% is owned by the state, 5.8% by the Ministry of State Property, 1.8% by the Russian fund for federal property and 5.9% by OAO, also state owned.

Private stockholders are: Garant SDK 11.1%; ING Bank 51.7%; Lukoil-Reserve-Invest Nikoil Depository Company 6.7%; Depository and Clearing Company 3.55%; CSFB Bank AO 0.8%; Citibank T/O 0.25%; National Depository Centre 5.5%; other companies 2.9%.


Last year, OMV achieved earnings of EUR 7.74bn in consolidated sales. OMV is considered to be one of the largest regional oil companies, and hold a 25% stake in the second largest European producers of polyolefin and 10% in Hungarian MOL, acquired in a hostile takeover. Over the last year, the value of the company has grown by over 14%.


Rosneft, a company owned by the Russian state, controls 30 branches in 18 regions throughout Russia: Western Siberia, Sakhalin, Northern Caucasus and the arctic belt of Russia. Over the last two years, the company has achieved earnings of $2.46bn. Total profits available to stockholders in 2001 totaled $461.78m.

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