Aug. 6 (Bloomberg) -- OMV AG, central Europe's biggest oil company, scrapped a hostile 2.8 trillion-forint ($18.4 billion) bid for Hungary's Mol Nyrt. after the European Union said the takeover would hurt competition.

After doubling its stake in Mol, Hungary's biggest oil refiner, to 20 percent last year, OMV offered to buy the rest for 32,000 forint a share in cash to expand refinery production and control the country's gas pipelines. Mol bought back shares to thwart the proposed takeover and the Hungarian government also opposed the bid.

OMV was prepared to sell part of a refinery network between Bratislava and Vienna while the European Commission had been asking for ``additional remedies'' the company couldn't accept, Chief Executive Officer Wolfgang Ruttenstorfer said today in an interview with Bloomberg television. OMV's withdrawal may boost competition as Russian companies led by OAO Gazprom and OAO Lukoil seek to expand in the region.

``OMV is withdrawing from its bid for Mol as they have hit a legal wall,'' said Alfred Reisenberger, an analyst with Cheuvreux in Vienna. ``It is good news as they can put their cash now to a more productive use.''

Retain Stake

The OMV offer would have given the Vienna-based company access to refineries in Slovakia, Hungary and Croatia and a pipeline network that could link gas shipments from Russia to the Balkans. OMV, which reported a 66 percent jump in profit today on record oil prices, doesn't plan to sell its 20 percent stake in Mol in the ``foreseeable'' future, Ruttenstorfer said.

OMV surged as much as 7.8 percent in Vienna to 45.60 euros, the steepest one-day gain since Jan. 24. The stock traded at 45.34 euros as of 11:23 a.m. local time. Mol slipped 2.8 percent to 18,850 forint in Budapest, extending its loss for the year to 23 percent.

OMV's decision to pull its offer was ``already priced into Mol's share price,'' said Attila Vago, a Budapest-based analyst at Concorde Securities. ``Political opposition and the opposition of Mol's management meant that this company was not for sale to OMV.''

The commission was set to give a formal ruling next month after outlining its objections to the proposed transaction in June. It said earlier this year it would examine how putting the companies' refineries under sole control would affect wholesale and retail competition for refined oil products.

Boost Refining

The combined company would have had a refining capacity of 43.2 million tons a year, 1.6 trillion barrels of oil equivalent in crude reserves and 427,000 barrels of oil equivalent of production, based on data from last year. The retail network would have had at least 3,500 filling stations.

OMV estimated annual savings of 400 million euros ($620 million) a year for the merger. Mol estimated that a merger would cost it as much as $250 million in operating profit a year.

Mol rejected the offer and started buying back its stock to fend off the approach. The Hungarian company has spent more than 500 billion forint on the buybacks.

``It was a bit foolish to start this game at all if there were significant competition concerns,'' Peter Tordai, an analyst with KBC Securities in Budapest, said by telephone. Tordai said OMV may consider selling its stake to a competitor such as Gazprom or Lukoil.

Gazprom, Russia's natural-gas exporter, signed Hungary on to its South Stream pipeline project in February and wants to turn the country into an energy hub by jointly building underground gas storage facilities with Mol.

Government Veto

Hungary's government, which last year abolished ``golden shares'' that gave it veto powers, passed the so-called Lex Mol Law to help ``strategic companies'' including Mol defend themselves against hostile takeovers.

OMV challenged the law and sued Mol to force it to drop measures intended to hold up the proposed takeover, such as limits on shareholder voting rights.

The Budapest-based refiner also brought in several new shareholders, in part to impede the OMV bid. Oman Oil Co. S.A.O.C. bought 8 percent of the company and Czech power company CEZ AS now holds 7 percent of Mol. BNP Paribas SA and OTP Bank Nyrt. are among banks that have borrowed Mol treasury shares.

Mol spokesman Gyorgy Bacsur declined to comment on whether Mol wanted to buy OMV's stake.

Earlier today, OMV said second-quarter net income rose to 684 million euros, or 2.29 euros a share, from 411 million euros, or 1.38 euros, a year earlier. That beat the 568 million- euro estimate of eight analysts surveyed by Bloomberg News. Earnings before interest and tax advanced 63 percent to 951 million euros and the company said it expects to post ``robust'' earnings for the full year.

To contact the reporter on this story: Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net

Last Updated: August 6, 2008 05:55 EDT