Poland’s government is considering merging the nation’s biggest oil and gas companies to avoid hostile takeovers

28.01.2016

The Ministry of Treasury has announced the commencement of analysis on the consolidation of the three biggest oil and gas companies in Poland: Orlen, Lotos and PGNiG. The government’s intention is to create a giant corporation with a value of PLN 60bn (about EUR 15bn). After completion of this procedure, the company would have about 90% market share in wholesale trade of fuels in Poland. Experts remain sceptical about this idea, pointing out that the new entity would be about 20 times smaller than the American market leader Exxon Mobil and would not gain any significant position on the market. However, the government highlights that the main reason for such a merger is the necessity to protect these firms against hostile takeovers. The Ministry of Treasury has stated that the companies are of strategic importance for national security and therefore require extraordinary protection.

The State Treasury is the key shareholder and exercises control over all three firms: it holds 70% of the shares in the PGNiG, while its shareholdings in Orlen and Lotos are 27% and 53% respectively.

Shareholders and investors at the Warsaw Stock Exchange were not pleased with this information, and the companies’ stock prices fell as a result. Some analysts have criticized this announcement as well, saying that there were no rational grounds for such a merger and that this was a political rather than a business decision. There are some doubts about the consequences in terms of competition law as well. The Office for Competition and Consumer Protection could possibly use its legal powers and block the entire transaction, but according to some commentators this is highly unlikely because of the government’s determination with respect to this project.

The government will complete an initial analysis of the potential consolidation, including various options for mergers, by the end of March 2016. No official date of any merger has been given to the general public.

The involved companies are of strategic significance to the Polish economy:

  • PKN "Orlen" is the leading petrochemical company on the Polish market. The company has several refineries in Poland (Plock, Jedlicz, Trzebinia) and abroad: three in the Czech Republic and one in Lithuania. 27.52% of the company's shares belong to the State Treasury. In 2014, Orlen's revenue was PLN 106,8bn, making Orlen the biggest company on the Polish market.
  • Lotos Group is the second largest Polish oil company, involved in the exploration and production of oil, its reprocessing as well as the wholesale and retail sale of high quality petroleum products. The group is made up of a dozen companies, including Lotos Fuels, Lotos Petrobaltic, Lotos Railway and Lotos Exploration & Production Norge. The Group has more than 30% market share in the wholesale fuel trade market and almost 10% in the retail market. Net income from sales in 2014 was PLN 28,501bn.
  • PGNiG’s core business includes exploration and the production of natural gas and crude oil and, through its key subsidiaries, the import, storage, sale and distribution of gaseous and liquid fuels, as well as the generation of heat and electricity. It has a stake in approximately 30 companies, including entities providing professional geophysical, drilling and maintenance services, which are highly esteemed on international markets. PGNiG has branches in Russia, Belgium, Pakistan, Belarus, and Ukraine. PGNiG SA is also the sole owner of PGNiG Upstream International AS which engages in exploration and production on the Norwegian Continental Shelf and in the Norwegian Sea. In 2014, the PGNiG Group achieved a net profit in excess of 2.8bn zloty, an increase of 47% compared to 2013. After having completed the building of the LNG terminal in Świnoujście, PGNiG’s next major plan is to build a pipeline between Poland and Norway to reduce Poland’s energy dependence on Russia. It is expected to bring several billion cubic metres of additional annual gas capacity to the Polish by 2022.