Fugitive CEO Shows Hungary-Croatia Energy Battle

After pushing to kick foreign energy companies out of Hungary, Prime Minister Viktor Orban is getting a taste of his own medicine from neighboring Croatia.

The affair features a Hungarian chief executive officer who is wanted by Interpol and sheltered by his home country, a Croatian bribery probe that put a former prime minister in jail, a possible downgrade for Hungary’s largest refiner and a battle over control of a $7.2-billion Croatian energy company that one analyst calls a “gem.”

“This is where things can get dirty,” Andreas Goldthau, an associate energy-policy professor at Central European University in Budapest, said by phone yesterday. “Hungary and Croatia will test the limits, given the prominence of the energy sector. The message is, don’t mess with our national champion.”

The dispute comes amid Orban’s effort to buy out foreign-owned energy companies after winning a two-thirds parliamentary majority in 2010. His goal is to extend government influence and lower utility prices before elections, part of a return to state control in some eastern European countries, according to Candole Partners, which specializes in regional energy. The losers may be foreign investors who were courted after the fall of the Iron Curtain more than two decades ago.

“Governments in central Europe increasingly want to control their national champions and use them as political instruments for various things, including keeping end prices low for consumers,” said Guy Burrow, a Bucharest-based partner at Candole Partners. “There’s definitely irony” for Hungary.

Arrest Warrant

Croatia issued an arrest warrant this month for Zsolt Hernadi, chairman and chief executive officer of Hungary’s Mol Nyrt., in connection with authorities’ probe into Mol’s 2009 purchase of a stake in INA Industrija Nafte d.d. Orban’s government responded by accusing Croatia of using methods “unacceptable in the European Union” to intimidate Mol and to retake control of INA.

The rift is a reversal from the generally warm relations the two countries enjoyed dating back as far as 1091, when they had a common ruler. Hungary supported Croatia’s independence from Yugoslavia in 1992 and its support helped persuade the EU to accept Croatia as its 28th member on July 1.

Less than four months later, though, Hungary canceled a planned trip by Foreign Minister Janos Martonyi to the Croatian resort of Dubrovnik to protest the arrest warrant for Hernadi.

Mol shares have dropped 8.8 percent, sliding 4.4 percent yesterday alone, and those of Zagreb-based INA are down 4.2 percent since Croatian police announced the arrest warrant on Oct. 1. INA accounts for about 36 percent of Mol’s oil and gas production.

State Ownership

Standard & Poor’s on Oct. 11 placed Mol’s BB+ long-term rating on review for a downgrade. It said the conflict between the company and Croatia’s government may lead to the reduction or sale of Mol’s INA stake or the deterioration of the business environment for Mol in Croatia.

Orban is defending Mol after his government bought E.ON SE’s Hungarian gas business for $1.3 billion on Oct. 1 and as the cabinet is in talks to buy RWE AG’s stake in Budapest gas company Fogaz. The cabinet plans to purchase as many as seven utility companies, control all gas storage facilities and make the household energy industry non-profit and state-owned, Orban said in a Sept. 23 state radio interview.

Elsewhere in eastern Europe, Slovakia’s government regained control over Slovensky Plynarensky Priemysel AS, the state gas company, in September after buying a minority stake from Czech utility company Energeticky a Prumyslovy Holding AS. The deal allowed the Slovak government to regain control over setting gas prices for end users.

Extra Profit?

CEZ AS, the Prague-based utility company, almost lost its license in Bulgaria this year as regulators probed the company’s consumer pricing. High electricity bills were triggering popular protests that later toppled the government. Albania revoked CEZ’s license and seized its assets in January following disputes over tariffs and taxes; CEZ has started arbitration.

“Greedy” energy companies make “extra profit” that Orban’s government is now “returning to the people,” Mate Kocsis, spokesman of Hungary’s ruling Fidesz party, said on Sept. 17, according to the party’s website.

Orban will have cut household energy prices this year by 20 percent when the second phase goes into effect Nov. 1. Facing parliamentary elections in the second quarter of 2014, he has made fighting consumer energy costs the central theme of his campaign.

Treasuring, Defending

“We treasure it and if needed, we will defend it,” Orban said of Mol on Oct. 15 in Tiszaujvaros, northeast of Budapest. He joined the embattled Hernadi to show support on the occasion of the expansion of Mol’s petrochemical unit. Hernadi, in his first public appearance since the arrest warrant, said Mol “always had problems and we always ended up solving them.”

Hungary battled to protect Mol from takeovers just as the Budapest-based company was acquiring INA in Croatia.

In 2009, Mol fended off a hostile takeover attempt by Austria’s OMV AG, which as a result sold its 21 percent stake in Mol to Russia’s OAO Surgutneftegas. Mol then blocked Surgut from exercising its voting rights. Orban stepped into the dispute in 2010 by having the government buy Surgut’s stake for 1.9 billion euros ($2.6 billion), making it Mol’s biggest shareholder.

“It’s the boomerang effect,” Peter Szentirmai, an energy analyst at KBC Securities in Budapest, said by phone. “Croatia is employing the sorts of tactics that Mol used against Surgut, except now the victim is Mol and, via the company, the Hungarian government.”

Premier Conviction

Croatia is investigating the contract that gave Mol management rights in 2009, when Hernadi was already CEO, after a court ruled the deal was the “product of corruption.” The case led to the conviction of former Croatia Prime Minister Ivo Sanader for having taken a bribe. He received a 10-year sentence and is appealing the verdict.

Mol denies wrongdoing. A Hungarian court rejected the Croatian arrest warrant against Hernadi, saying local prosecutors had already conducted an investigation into the deal and found no evidence of criminal wrongdoing by Mol or its executives.

Hernadi, who can’t travel outside of Hungary because the arrest warrant for him applies across the EU, will stay as head of the company, Mol said in a statement on Oct. 2. Mol declined to comment on its intentions regarding INA in an Oct. 14 e-mail.

Mol owns 49.1 percent of the company and the Croatian government holds 44.84 percent. INA is a “gem” for Mol and a cornerstone of its central European strategy, Szentirmai said. INA also provides a gateway to the Adriatic Sea for Mol, allowing the transport of liquefied natural gas and cutting Hungary’s energy dependence on Russia.

Independent Investigation

Orban’s government asked Mol’s management to consider selling its INA stake and suing for damages after Croatia issued the arrest warrant for Hernadi, 52. Croatia’s government has said the bribery investigation is being pursued by independent law-enforcement authorities.

“We recommend to the Croatians that they consider -- just like we usually do in Hungary -- to take these shares into state hands and to settle” on the price “in a fair way,” Orban said in an Oct. 4. radio interview.

Croatia’s government has denied reports that it’s seeking to buy Mol’s INA stake. The Croatian cabinet is facing a budget squeeze, with a forecast budget gap of 5.5 percent of economic output next year. That would breach the EU’s 3 percent limit and may trigger the bloc’s excessive-deficit procedure.

No Gambling

Croatia won’t “gamble with state finances” by entering “unpredictable financial arrangements” that “harm the budget,” Croatian Prime Minister Zoran Milanovic said on Oct. 4. At the same time, he rejected negotiating over Hernadi’s arrest, saying that was for the independent judiciary to decide.

Mol’s INA stake is worth about $3 billion considering what Mol has invested in the Croatian unit, according to Concorde Ertekpapir Zrt, Hungary’s biggest broker. Yet it makes little sense to sell as INA was the company “that eventually made it possible for Mol to gain a foothold in the Balkans,” Concorde analyst Attila Vago said in an Oct. 7 e-mail.

It would also be difficult for Mol to get the right price as long as the standoff with the Croatian government continues, Deutsche Bank AG analyst Tatiana Kapustina said by phone.

“Mol will try to exit and the question now is on what terms the company will be able to exit,” Moscow-based Kapustina said. “It’s going to be quite challenging to ask a buyer to pay a high price for a relatively troubled asset.”

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