Aug. 8 (Bloomberg) -- OMV AG, Austria's state-controlled oil company, said it won't proceed with an unsolicited bid for rival Mol Nyrt. after the Hungarian energy company's management rejected the advance.

``We want a friendly combination based on the recommendation of the board of Mol,'' OMV Chief Executive Officer Wolfgang Ruttenstorfer told journalists in Budapest today. ``A bigger entity could finance bigger projects.''

OMV in June raised its stake in Mol to 19 percent and asked for talks, which were rejected by the company and the Hungarian government. This is the second time Ruttenstorfer has been blocked from creating a large-scale energy supplier in the region. His bid to combine with Austrian utility Verbund collapsed last year.

``OMV is in a deadlock situation and it's very difficult for them to get out of this because of the stiff opposition in Hungary,'' said Alfred Reisenberger, an analyst at UniCredit in Vienna. ``But the whole transaction makes sense from a strategic viewpoint as size matters in the oil industry when competing for projects around the globe.''

OMV plans to merge with Mol in the next two to three years, Ruttenstorfer said, adding he expects the Hungarian company's position to change in the future.

Mol shares fell 1.6 percent to 27,250 forint in Budapest, the lowest since June 22, while shares of OMV rose 4.1 percent to 44.99 euros in Vienna. The combined value of both companies is $35.1 billion, based on today's closing prices.

Access

A merger with Mol would give OMV access to the only refineries in Slovakia and Hungary and stakes in two Croatian plants. OMV failed in a bid last year to merge with Austria's largest utility Verbund, following opposition from politicians and shareholders.

OMV's previous bid to join with Verbund ``didn't make sense'' Reisenberger said, because an oil company and power company have ``no strategic advantages.'' Mol's merger with OMV would benefit the Hungarian company because it ``won't have too many other options if they want to grow.''

A combined Mol and OMV would have headquarters in Vienna and Budapest and include managers from each company. The two companies held talks on joining and cooperating on projects for a year leading up to OMV's stake increase in June, Ruttenstorfer said, adding the talks led to ``very little.''

OMV has no plans to sell its Mol stake and considers it a ``good investment,'' Ruttenstorfer said. The stake will also ``prevent others from looking at Mol.''

`Important Asset'

The Austrian company's stake in Mol ``is an important asset as OMV will have a say in the future of Mol in case consolidation in the industry continues,'' UniCredit's Reisenberger said.

A merger could save as much as 4 billion euros ($5.49 billion) over 10 years, Ruttenstorfer said, rejecting Mol's claim that the two companies would have to sell a number of assets in the region because of competition concerns. ``There could be some minor conditions such as the sale of some filling stations, but there would be many buyers for that,'' Ruttenstorfer said.

Mol said yesterday it may cooperate with OMV on gas projects. ``OMV's stated intent of friendly talks is misleading and has the objective to hide the planned takeover of Mol,'' the company said.

To contact the reporter on this story: Matthias Wabl in Vienna at mwabl@bloomberg.netBalazs Penz in Budapest at bpenz@bloomberg.net.

Last Updated: August 8, 2007 11:53 EDT