The chances are growing that MOL will divest its 49.2% INA stake to a Russian buyer, as amicable agreement with the Croatian government is further away than ever and Croatia itself supports the deal, as it would be a seller along with the Hungarian company. The transaction might be a trigger for MOL stock.
Croatia supports MOL divestment. EconMin Ivan Vrdoljak revealed that 4.6 Croatia would not block MOL's divestment of its 49.2% INA stake to a 7.4 potential Russian buyer. The Croatian press rumored that Rosneft was 3.1 showing interest. Moreover, Croatia would also sell some 25.7% stake 4.4% along with MOL to reduce its holding to 25% plus one share in INA.
MOL's view is changing. Looking at MOL's struggle for over a decade in Croatia and a potential exit together with the state, we believe that MOL would support the sale of its stake given an appropriate bid. We think the value of MOL's INA stake depends on the rights attached to the stake, but both the government and MOL seek the highest bid.
INA sale could be trigger, depending on price. We believe that the sale of INA shares could be a positive trigger for the depressed MOL stock price, depending on the price. The rumored USD 2.5bn price tag would be a positive catalyst.
Exiting INA would be best political outcome for Croatia, while MOL seems tired of fighting
The Croatian Economic Minister, Mr. Ivan Vrdoljak surprisingly said at the end of January that Croatia would not block MOL's sale of its 49.2% stake in INA to a new buyer, even a Russian oil company. Moreover, Croatia would also sell some sell shares along with MOL and would retain only 25% plus one share in INA in the long term. The Croatian press mentioned Russian Rosneft as a potential buyer for the stake, even though other buyers like Serbia's NIS owner Gazpromneft would seem more logical to us. Rosneft is already present in Europe after a 2010 deal, when it bought into Germany's Ruhr Oel for USD 1.6bn. Russian Deputy Prime Minister Arkady Dvorkovich has expressed confidence that a Russian energy company will show an interest in buying the stake of the Hungarian oil company MOL in Croatia's INA, noting that the Russian government approves of and supports the activities of Russian companies going in that direction.
The comment could eventually end the long-running dispute between MOL and Croatia over control and other key corporate issues at INA. We think the sale to Rosneft or any other potential buyer could help the Croatian government exit the deadlock and would be useful for political purposes. The government accused the former PM, Mr. Ivo Sanader of bribery in the case of selling INA stake to MOL back in 2009. The Cabinet could show that they protected the country from the rigged deal, and even sold under better terms to a new buyer with more favorable conditions. Moreover, the government can raise cash for the budget, which is under heavy pressure in the country. It also seems to us that acceptance of a Russian buyer is not as negative in Croatia as one may think. The recent example of Hungary (the government signed an agreement to build a new nuclear plant with Rosatom) shows that hostile attitudes towards Russia are thawing in the region. Rosneft has a deeper pocket and can reassure the Croatian public by supporting INA's investments.
The sale could end MOL's troubles over its Croatian assets, even though it strips the company of a key growth story and downstream exit towards the Mediterranean market. Moreover, it might get a more powerful downstream player in its neighborhood. We do not share fully fears over the use of the Adriatic pipeline, which offers an alternative supply to MOL's key refineries. As Croatia is a part of the EU now, it would be required to share oil pipeline capacities with third parties, including MOL, when necessary. On the positive side, MOL could get rid of a key poison pill, potentially for a fair price, which has used up the most management resources for the last three years and which was a key factor for uncertainty surrounding the group.
Valuation is name of the game
The question remains over the valuation of this stake. MOL spent some USD 1.3bn to accumulate its stake, while INA proportionally invested some USD 1.8bn over 11 years. INA has a book value of around USD 2.6bn. The current stock market capitalization of INA at approx. USD 6bn is not a good indicator, due to the low free float of the company. At this price, INA has a valuation of 13.0x EV/EBITDA, well above its peers' median of 6.8x. This price definitely reflects a large upside in EBITDA - growth of profitability has been stuck, as reforms had not been achieved at the company due to the current fight among the shareholders.
A proper valuation is rather a difficult task, as it depends on rights along with the stake. We believe that any potential bidder would stick to full control and the key restructuring issues at INA, which are 1) 2) 3) 4) turning Sisak refinery into product and crude depot cutting INA's bloated workforce selling Prirodni Plin to state or raising gas prices to market levels in order to eliminate gas division losses continuing investments into Croatian upstream activity and agreeing on royalty and mining issues On the other hand, a potential Russian buyer would put money into the firm, would probably support the upgrade of the Rijeka refinery and may help INA regain its Syrian production rights. The influence of Russian energy firms would grow in the former Yugoslavia, as Serbia's NIS was taken over by Gazpromneft and Bosnia's Bosanski Brod is held by Russian Zarubezhneft.
The Croatian press rumored a USD 2.5bn price tag for MOL's stake, which we believe would be acceptable for MOL and we believe would be welcomed by the market. The potential deal might have also been the topic of the latest Russian-Hungarian dialog, which ended with the recent nuclear deal between the two countries. We think that a USD 1.5-2bn price tag is within the range of acceptance for MOL and for MOL's shareholders. Importantly, a high price is important for Croatia as well, as selling low would make the deal politically unacceptable.
What would MOL do with the cash?
MOL's balance sheet would improve significantly after this deal. We have prepared three scenarios to show how MOL's balance sheet would change after selling the INA stake for USD 1bn, 2bn and 2.5bn. For the sake of simplicity, we assumed that the asset value of INA is equal in INA's standalone financials and MOL's book. In reality there is some difference (no more than 10% according to MOL) as MOL revalued assets after acquisition (upstream assets are worth more, downstream assets are worth less in MOL's own books).