Cablegate: Negotiations Stall On Takeover of Ina; Rumors Of

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UNCLAS ZAGREB 000781

SENSITIVE
SIPDIS

DEPARTMENT FOR EB/ESC/IEC

E.O. 12958: N/A
TAGS: ECON ENRG HR
SUBJECT: NEGOTIATIONS STALL ON TAKEOVER OF INA; RUMORS OF
RUSSIAN INTEREST IN TIFON

1. (SBU) Summary. Representatives of the Croatian
government and Hungarian MOL have so far failed to agree on
the terms of a share swap that would give MOL a majority
stake in the Croatian national oil company INA. The previous
shareholders' agreement expired at the end of October, giving
MOL greater freedom to trade its INA shares. The Croatians'
main priority for the moment is to renegotiate this
agreement, which would also give the Croatian government the
right to repurchase INA shares should MOL decide to sell out.
The Croatian side is also demanding that INA's gas business
be separated in hopes of retaining some control over a
strategic industry. Economic conditions in Hungary and in
energy markets have put MOL in a difficult position as well,
leading to rumors that it may try to sell off its chain of
Tifon service stations in Croatia, possibly to Russian
Lukoil. These reports have not risen beyond the level of
rumor, but may make some logical sense as MOL prepares to pay
a $900 million bill for the INA stock purchase which ended
October 3. End summary.

2. (SBU) Negotiations have stalled between the Croatian
government and Hungarian MOL on a share swap that would
complete the privatization of the national oil company INA by
giving MOL a majority stake. MOL currently holds 47.5
percent of INA shares after a public purchase offer that
ended at the beginning of October. The GOC still retains 45
percent and its ownership cannot fall below 25 percent in
accordance with legislation governing the sale.

3. (SBU) Also at issue are the terms of a new shareholders'
agreement. The old agreement, which expired on October 28th,
limited MOL's freedom to trade its INA shares and gave the
Croatian government the right to repurchase INA shares in the
event of a MOL takeover. The Croatian government is focusing
for now on renegotiating this shareholder agreement, which
would extend the government's rights on share trading for
five years, and is putting off any decision on the share swap
until this agreement is successfully renegotiated. The
government has also asked to separate INA's gas operations in
a bid to retain some control over a strategic industry. This
has fueled speculation that Prime Minister Sanader is in no
rush to complete the sale, using the government's remaining
INA shares as a bargaining tool to achieve long-term
strategic interests.

4. (SBU) Current market conditions are partially to blame
for the impasse. MOL's stock has already fallen 60 percent
this year. Lower fuel prices and wider economic concerns in
Hungary have damaged the investment climate. Regardless of
these challenges, the expiration of the shareholder agreement
has put MOL in an advantageous position. The senior
strategic advisor to the INA CEO told us "MOL holds all the
cards." MOL can now trade its INA shares freely, or sell out
completely without consultation with the Croatian government.

5. (SBU) At the margins of the negotiations, rumors have
emerged of possible interest in Tifon by Russian Lukoil.
Tifon is a chain of service stations owned by MOL which
represents INA's main competitor in the retail gasoline
business in Croatia. Our INA contact told us he did not
believe the rumors were true, but said it made some logical
sense for MOL to be looking for a Tifon buyer, given MOL's
financial difficulties and the $900 million about to be
transferred for its INA shares.

6. (SBU) COMMENT. We have seen no independent evidence that
Lukoil is in any kind of talks with MOL about Tifon, and the
reports may simply be thinly sourced speculation in the
press. However, given MOL's bargain stock price, there is a
small but real possibility of interest in MOL by foreign
firms. Without a new shareholder agreement in place, Croatia
would have no means to stop either Tifon, or MOL's shares in
INA, from passing to a third party through a takeover of MOL.
END COMMENT.
Bradtke

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