MOL held a conference call on Friday to explain the conditions of the deal with E.On. In light of this we are taking a more negative stand on the story.
1) MOL sells the storage and wholesale business to E.ON for EUR 450m in cash and EUR 600m in debt takeover. E.ON transfers the amount to MOL in 1Q.
2) The parties also agreed that MOL should pay back up to EUR 150m to E.ON as a part of a risk sharing agreement related to potential losses in the wholesale business. Given the gloomy prospects of this business (import gas price is expect to be higher than average selling price in 1H06) MOL immediately makes full provision for the potential payback (EUR 150m), admitting that there is a high chance of paying back this money to E.ON. Otherwise, MOL will release the provision later the year, which would boost results.
3) In MOL's official statement Friday morning the company communicated a 300m + 600m total selling price for the storage and wholesale assets. However, the company failed to mention that the deal also includes the 3bn cubic meter cushion gas it purchased from the state for EUR 250m in December. Thus, on a worst-case scenario, MOL sold the storage & wholesale assets to E.ON for only EUR 50m (450m selling price, less 150m payback to E.ON, less 250m paid for the state) in equity and 600m debt takeover. This results in an EV of EUR 650m versus the original enterprise value estimate of EUR 900m made in 2004.
4) The parties also agreed that in case of (publicly unspecified) better market conditions in the wholesale business, MOL is entitled to EUR 290m further payment from E.ON. However, MOL admitted to us that at the moment, they see a slim chance of realising that amount.
Comment: We view the above details as negative for the share price, primarily due to the lower than expected price. Moreover, we feel the communication was also misleading as the original statement did not mention the sale of the cushion gas, which lowers the final price. We also note that the two CEOs of the company were not present at the conference call despite the importance of the deal. This might suggest to many that they were not entirely proud of the final agreement.
Financial impact: As discussed above, in the worst-case scenario, MOL has sold the storage & wholesale assets for EUR 650m versus the original EV estimate of EUR 900m, and may have lost EUR 250m or HUF 580 (PLN 8.8) per share. Since the stock fell HUF 640 or 3.0% on Friday (against regional sector drop of 1-2% due todeteriorating refinery margin environment) we are inclined to say that the market has almost fully priced in the negative impact of the deal.