Global Insight Perspective
Significance

Joining the two groups will create central Europe's largest energy group, capable of fending off takeover from other operators as the European Union (EU) market consolidates.

Implications

The deal is aimed at boosting supply security as gas and power consumption rises. The new group plans to increase its fleet of gas-fired power stations and, by combining gas production and gas supply contracts with power generation, to increase the bias of its portfolio towards meeting energy supply security in central Europe.

Outlook

The move follows rising concern in Austria about the security of the country's energy supplies and the increasing presence of Gazprom, which is seeking to expand in central and Western Europe, where energy prices are higher. At the same time, European regulators are concerned about rising efforts to create national champions in the gas and power sectors.

Integrated Energy Group Seen as Win-Win for Both Parties

Austria has joined France and Spain to become the latest European Union (EU) member state to try and build a national energy champion capable of competing in Europe's deregulating gas and power markets.

In a move first heralded earlier this week, Austria's state-owned oil and gas group OMV has announced further details of its plans to merge with publicly held Austrian power group Verbund. The deal, valued at 12.1 billion euro (US$15.4 billion), will create a group with a market capitalisation of 29.5 billion euro, with over 18 billion euro in combined sales.

Labelled a merger by OMV but considered a takeover by at least one of Verbund's shareholders, the deal is being heralded as a 'win-win situation for both partners', which will create 'greater security of power supply'. OMV and Verbund will hold a 60/40 stake in the new group, which will combine the production, transport and trading of oil, gas and electricity, hydro and gas-fired generation capacity and gas and power supply operations. The new group will be headquartered in Vienna.

OMV Chief Executive Wolfgang Ruttenstorfer said that the integrated energy group would lead to 'greater competitive strength, sustainability and security of supply'. 'This will make a decisive contribution to strengthening Austria as a business location over the long term, especially as energy is one of the critical development factors of the future,' Verbund Chairman Hans Haider added.

Subject to shareholder and regulatory approval, the merger is expected to be completed towards end-2006, with the integration of Verbund into OMV undertaken by end-2007. As a first step, the Austrian state will hand its 51% stake in Verbund to OMV in return for a mix of newly issued OMV Verbund shares on a 1-for-6.4893 ratio against the issuance of a convertible bond. Once the OMV-Verbund transaction has been completed, the new group will hold the controlling majority in Verbund.

OMV and Verbund: Profile

OMV Aktiengesellschaft
OMV is Austria's largest listed industrial company and central Europe's leading oil and gas group. The group is active in exploration and production (E&P) in 18 countries on five continents and in refining and marketing in 13 countries. In the gas business, OMV owns storage facilities and a 2,000-km pipeline system, transporting 45 Bcm/year of natural gas to Germany and Italy. Key shareholdings include a 51% stake in Romania's Petrom, 50% of Austrian gas supplier EconGas, 45% of the Bayernoil refining network, 10% of Hungarian gas group MOL and 34% of Turkish retailer Petrol Ofisi. OMV has oil and gas reserves of 1.4 billion boe, daily production of around 338,000 boe and an annual refining capacity of 26.4 million metric tons. The group also owns chemical and petrochemical plants and a filling station business in 13 countries. OMV reported group sales of 15.6 billion euro in 2005 and employs a workforce of 5,226.

Österreichische Elektrizitätswirtschafts (Verbund)
Verbund is one of Austria's largest listed companies with a presence in power generation, transmission and supply. Verbund owns total generation capacity of 8,300MW, with 107 hydroelectric plants and nine thermal power plants generating a total of 29,000GWh/year, equal to half of Austria's electricity consumption. Verbund also controls a 3,300-km power transmission network in Austria and supplies end-users. Outside of Austria, Verbund owns stakes in power trading and distribution companies in Germany, Slovenia, Hungary, Poland and Italy and is developing its presence in the Czech Republic, Slovakia and Greece. Verbund reported net profit of 402.1 million euro in 2005 on sales of 2,506.7 million euro in 2005 and operating profit of 526.5 million euro. It employs a workforce of 2,400.

Source: Global Insight, OMV

Outlook and Implications

OMV has a strong position in gas transit, storage and sales through its 50% subsidiary EconGas and its Romanian activities. Verbund is the largest generator and transporter of electricity in Austria, operating Austria's transmission network and a fleet of power stations.

Joining the two groups will create central Europe's largest energy group, capable of fending off takeover from other operators as the European Union (EU) market consolidates. It will also enable the merged group to compete with other dominant operators, such as Germany's E.ON, Italy's Enel and Russia's Gazprom, all of which are keen to boost their presence in the central European region.

The deal is aimed at boosting supply security as gas and power consumption rises. The new group plans to increase its fleet of gas-fired power stations and, by combining gas production and gas supply contracts with power generation, to increase the bias of its portfolio towards meeting energy supply security in central Europe. The deal is also expected to boost OMV's position in the international energy market by integrating oil, gas and electricity operations, particularly trading.

So far, analysts have been sceptical of the merits of the deal, with both OMV and Verbund's share prices down following the announcement of the merger. However, OMV's strong position in central Europe is likely to provide the new group with opportunities for power sector expansion in countries where Verbund is not so far present. The two are reportedly considering building a number of gas-fired power stations in central Europe to meet the rising demand for electricity. OMV's own gas resources and the additional supply expected to be piped through the planned Nabucco link will help to secure supplies from 2011.

The move follows rising concern in Austria about the security of the country's energy supplies and the increasing presence of Gazprom, which is seeking to expand in central and Western Europe, where energy prices are higher. At the same time, European regulators are concerned about rising efforts to create national champions in the gas and power sectors. It remains to be seen whether Austrian and European merger authorities will see fit to clear the deal. However, with larger combinations being attempted in France and Spain, OMV and Verbund's merger is likely to slip through the net.

Raul Dary

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raul.dary@globalinsight.com

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