UPDATE 1-MOL investors slam CEZ tie-up, seen as bid barrier

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By Tom Bergin

Investors in Hungarian oil company MOL slammed a deal that would give Czech utility CEZ a 7 percent stake in MOL , saying it was a ploy to frustrate a takeover by Austria's OMV AG .

CEZ and MOL announced a joint venture on Thursday to build power plants, into which MOL would inject assets and CEZ will contribute its power generation expertise.

As part of the deal, CEZ will buy a stake in MOL and MOL agreed to cover the cost of financing the share purchase.

MOL shareholders said there may be an operational logic to cooperating on building power stations but said it looked like MOL was contributing more than CEZ for an equal share in the jv.

They also wondered why the deal needed an equity transfer that involves substantial cost for MOL.

"The business rationale is next to nothing ... The management clearly have no interest whatsoever in creating value for their shareholders", one long-standing MOL shareholder said. "They are solely interested in maintaining MOL's existence as a Hungarian company."

OMV boosted its 10 percent stake in MOL to almost 20 percent in June and proposed a full merger. In September the Vienna-based company said it would be prepared to pay 32,000 forints per share, or $20 billon, for MOL.

But MOL, Hungary's largest company by market value, has rejected OMV's approaches and has embarked on a share buyback programme that has left it with effective control over around 40 percent of its own stock.

The Hungarian government has also rejected the proposed merger and passed a law that would make a deal much harder -- prompting legal action from the European Commission.

DEFENSIVE TACTIC?

Investors and analysts said the CEZ deal, like the buybacks and recent strategic initiatives such as the high-priced purchase of an Italian refiner in July, was just another defensive tactic.

A MOL spokesman denied its actions had been defensive.

While most criticism of the CEZ deal centred on the equity stake, even the power generation deal was treated with scepticism by some shareholders.

MOL is contributing power generation assets and related infrastructure, gas supply contracts and an agreement to buy power from the joint venture. CEZ did not disclose its contribution and MOL said CEZ's seed contribution was limited to "expertise".

Future investments in the venture will be equally split.

"Expertise is an intangible asset," a second MOL shareholder said. "There's no value to it ... They (MOL) are not really gaining anything from CEZ in this transaction."

James Neale, oil analyst at Citigroup, said the deal was "further evidence of its (MOL's) scattergun approach to corporate strategy".

Investors also questioned the provision whereby CEZ will also buy a 7 percent stake in MOL at 30,000 forints per share -- below the level MOL indicated it would pay, which MOL dismissed as undervaluing MOL.

However, MOL has agreed to pay CEZ 10,000 forints per share for an option to buy the stock back at 20,000 forints at any time over the next three years, the MOL spokesman said, which means MOL should not lose on the transaction if its stock rises.

While CEZ is unable to enjoy any upside on MOL stock, with a current share price of almost 24,000 forints and an indicative bid of 32,000 forints on the table, the Prague-based firm's downside is limited.

The clear benefit of the transaction to CEZ is that MOL will also pay interest of around 8 percent to cover the outlay for the MOL stock and CEZ will also enjoy dividends.

This equates to a total return of 10 percent, the second fund manager said, adding that as MOL's cost of capital was around 7.5 percent, this would be value dilutive for MOL.

OMV said the deal was "pure financial engineering" and value destructive.

A third fund manager said he expected CEZ to vote its shares in favour of MOL's management, further limiting the ability of independent shareholders to influence company management.

"They are stealing away our voting rights", the investor said. "We are being treated like second class citizens."

(Editing by David Holmes/Rory Channing)

Keywords: MOL CEZ/INVESTORS

[LONDON/Reuters/Finance.cz]