PKN Orlen to purchase Mazeikiu Nafta from Yukos for $1.5 billion

  • 2006-05-31
  • By TBT staff

RISK TAKER: Chalupec believes the sale will strengthen Poland's energy sector and give PKN Orlen more leverage with Russian suppliers.

VILNIUS - In what can easily be considered the Baltic deal of the decade, Yukos International has agreed to sell its majority stake in Mazeikiu Nafta to Poland's PKN Orlen for nearly $1.5 billion. As part of the agreement, Lithuania's government will sell an additional 30.66 percent to PKN Orlen for $851 million, which will constitute a windfall for the Baltic state's budget.

The government may sell another 10 percent in the future as well under option arrangements. These shares would be sold for $278 million if the Polish concern uses the option within a five-year period, or $284.5 million if within three.
The government approved the deal on May 29 and asked lawmakers to give the transaction priority status.
A separate agreement between PKN Orlen and the government could be signed in mid-June, government officials said May 30. The Polish company has already inked the relevant documents.
PKN Orlen expects to finalize the transaction in the first quarter of 2007 at the latest, as it still needs approval from the European Commission.

The Yukos-PKN Orlen deal, which was signed on May 26, will ostensibly end months of legal and political wrangling that stretched from Kazakhstan to the United States. As recently as last month, Lithuanian authorities threatened to nationalize Mazeikiu Nafta, the only refinery in the Baltics and Lithuania's largest corporation, on fears that the Russian government or an unfavorable company would take over the company.

In fact, the deal was made possible after a U.S. court lifted the restraining order on the sale, due to a request by Yukos' bankruptcy manager. Still, from the beginning PKN Orlen was seen as a long shot since the company has no production capacities. For Lithuania, which suffered from the Williams International debacle in the 1990s, the main criteria was stability of crude oil supplies. According to some reports, Prime Minister Algirdas Brazauskas, who favored TNK-BP, a British-Russian joint venture, was unwilling to discuss PKN Orlen's candidacy as a strategic investor.

In the end, however, the other bidders 's KazMunayGaz, Lukoil, TNK-BP 's had equally vulnerable positions. PKN Orlen's persistence paid off, and the company now hopes to create a downstream fuel trader and retailer in Poland, the Czech Republic and Lithuania. As part of the deal, the Polish company will invest some $1 billion in the refinery's modernization.
"The transaction will strengthen the energy security of Poland," CEO Igor Chalupec was quoted as saying. He and other executives have hedged that the company's increasing size will give it leverage with Russian suppliers, who are likely to bristle at the idea of a Polish company owning the Lithuanian refinery.
Relations between Russia and Poland have deteriorated since last year's elections in Poland, which saw the establishment of a conservative minority government.

"We are serious buyers of Russian crude, and I think that Russian producers are satisfied with these revenues," Chalupec said.
But the reaction from Moscow, however, was cool. Sergei Grigoriev, vice president of Transneft, Russia's crude oil pipeline monopoly, was quoted as saying that "we really don't know who they [PKN Orlen] are."
"I suppose they should to talk to Russian producers about supplies and only then come to us," he said, according to The Moscow Times. "We know their rivals 's Lukoil, TNK-BP and KazMunayGaz 's we have met them many times. But we have never met PKN or Russian producers who are willing to supply them with crude."

If the past is any indicator, the situation could get ugly. Lukoil was so offended by losing to Williams International in the 1990s that it halted supplies to Mazeikiu Nafta several times. And given Russia's increasing assertiveness in relations with its neighbors, PKN Orlen could be in for a rough ride. A PKN Orlen executive, Cezary Filipowicz, said the company could use the Butinge terminal to import crude deliveries (the terminal has that ability) if Russia cuts off supplies.
Economy Minister Kestutis Dauksys said Lithuania would retain the right of first refusal in Yukos' sale. Though a formality, the Russian company, which is being dismantled by the Kremlin, will first have to offer the stake to the Lithuanian government and only then will the transfer of shares take place.

The new agreement with PKN Orlen would repeal the unfavorable provisions laid down in previous agreements signed with the then-investor into the Mazeikiu complex, Dauksys noted. The agreement may also stipulate that the government could require PKN Orlen to sell its shares in the refinery if it produced losses for five consecutive years.
What's more, the government could also demand the shares in Mazeikiu Nafta if an investor unfavorable to Lithuania acquires over 50 percent of voting shares in PKN Orlen.

Also, PKN Orlen will probably have to announce an official tender offer to buy the remaining shares in Mazeikiu Nafta, which also includes an export terminal in Butinge. Small shareholders hold a combined 5.64 percent, the value of which would be $149.7 million at the price offered by PKN Orlen.
"In mid-December 2005, the Constitutional Court announced that the provision of Mazeikiu Nafta legislation, which enabled the buyer to avoid the announcement of an official tender offer, contradicted the Constitution. Thus it seems that PKN Orlen does not have any chance of avoiding the official tender offer to buy the remaining shares in Mazeikiu Nafta," said Vytautas Plunksnis, an analyst with Finasta.

PKN Orlen has not yet disclosed its intentions to buy the shares in Mazeikiu Nafta from small shareholders.
Mazeikiu Nafta posted earnings of 885.7 million litas (265.7 million euros) in 2005. The company decided last week not to pay dividends.

PKN Orlen 's fact sheet

Operates six refineries 's three in Poland and three in the Czech Republic;
Total deep refining capacity 's 21.7 million tons;
Operates some 2,700 filling stations in Poland, Czech Republic and Germany;
Largest fuel retailer in Poland;
Produces no crude oil, though expansion strategy calls for securing production capacity;
2005 sales 's appr. $14 billion;
Employs 20,300 people .