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Turning a Challenging EC Decision Into an Opportunity: The PKN Orlen and Grupa Lotos Merger

Turning a Challenging EC Decision Into an Opportunity: The PKN Orlen and Grupa Lotos Merger

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While the deal looked almost impossible at first, with European Commission officials hawkish about its competition implications, PKN Orlen’s acquisition of Grupa Lotos eventually came to pass. For the two Polish energy leviathans the path towards unification was not an easy one, but that goal became a lot nearer following the EC’s 2020 approval. To learn more about the merger and how it managed to beat the odds we spoke to SMM Legal Managing Partner Maciej Mataczynski and Rymarz Zdort Managing Partner Pawel Rymarz.

The Setting

“The PKN Orlen-Lotos merger has been a constant subject of debate in the Polish business community for the past 20 years,” Mataczynski says. SMM Legal helped PKN Orlen obtain merger clearance from the EC – but it was not easy.

According to Mataczynski, having two large companies competing in Poland’s wholesale and retail fuel business, while both being ultimately state-owned, has always been “suboptimal, from an economic and business standpoint. Especially so in times of mounting business challenges and rising competitive pressure from both OMV and Mol, with increasing capital expenditure demands.” Mataczynski says that for this merger to become a reality, however, a change in leadership needed to happen. “To drive this topic home, it was necessary to have a determined and thorough leadership in place. Finally, that all converged in point with the change of PKN Orlen’s CEO – and so the merger process started to take shape five years ago, in 2018.”

What It Took

As Mataczynski puts it, there are two broad legal work perspectives that required consideration. “Firstly, there is the competition perspective. This was a 2-to-1 merger, meaning that the EC had a major concern it would result in a market monopoly.” He notes that even the EC itself highlighted how this was one of the most difficult cases placed before it, in the past two decades. “Secondly, there is the corporate perspective. Following EC clearance, PKN Orlen had to engage in a comprehensive stream of remedy transactions in order to have the merger happen,” Mataczynski says. “The remedy set was one of the biggest we have ever seen, with a number of major investors from outside Poland, including Saudi Aramco,” he stresses.

“To put it simply, when you have a 2-to-1 merger, there is an overlap of competing activity,” Mataczynski explains. “In these instances, the EC requires divestiture of one of the competing activities. In this case, that meant a whole heap of business operations.” Convincing the EC that there would be enough competition on the market – coming in from neighboring countries and imports – following the merger required tough negotiations. “The EC was insisting on divestments, so we agreed on a 50/50 approach: to divest 30% of the Lotos refinery in Gdansk while also including contracts that would guarantee up to a 50% approach to the output of important products, like diesel and gasoline. The other half would come in via imports, which would be enhanced and secured by swaths of logistics commitments,” Mataczynski adds.

“This wasn’t a painless compromise,” Mataczynski notes, as it involved “30% of the refinery business, including 417 Lotos stations and eight logistic storage assets!” An additional layer of problems resulted from the fact that “the refinery was owned by a company that owned a lot of other assets – meaning that we had to repackage the refinery business,” he says.

In the end, the final remedy tally included the sale of 30% of the refinery business in Gdansk and the wholesale Lotos business, which Saudi Aramco acquired; the sale of Lotos Paliwa – the retail corporation of Lotos – which included 417 stations, following carve-outs; the sale of bitumen assets in the south of Poland, as well as eight storage businesses, to Unimot, a local independent fuel wholesaler; and, finally, the sale of the Lotos biofuel business to Rossi, a Czech Republic-based company that is partly-owned by Mol. This final list included “a number of supply contracts as well,” Mataczynski adds.

The principal legal advisor to Grupa Lotos for this massive merger was Rymarz Zdort. With the firm working on the due diligence procedures back in 2017, they also worked on the merger itself. “This portion of our engagement was from 2018 until 2020, when satisfaction of the conditions necessary for the EC’s approval was eventually achieved,” Rymarz says. “Given that Lotos was the owner of many assets for which the EC had prescribed remedies, we were engaged to handle the negotiation aspects of their sale.”

According to Rymarz, the most complex part of their work had to do with the sale of 30% of the Gdansk refinery to Aramco. “This was the first time that Saudi Aramco came to the European markets, which meant that we had to engage in intense negotiations. Now, they are the owners of 30% of the assets and have undertaken crude oil processing obligations as well.” On top of this, he says they had to balance all the other transactional streams at the same time, which included the one involving Mol and concerning the 417 fuel stations; the sale of the bitumen and logistics businesses to Unimot; the sale of Lotos Biopaliwa; and the sale of a 50% interest in the Lotos-Air BP jet fuel business. “All in all, we had to execute the signing of six SPAs within the span of 48 hours,” Rymarz says. “We had a small team of six people, and, honestly, sleep deprivation helped a lot with getting this done in time,” he adds with a smile.

“This process was quite long and started all the way back at the earliest stages of EC discussions,” Mataczynski says. “It was all the more challenging given that it was not a prime time for refinery investments – a lot of investors were looking for exit opportunities following the rising tide of stringent environmental regulations. It was more difficult than we initially hoped it would be.” Still, he notes, “we managed to complete the processes with a number of top-tier investors – all of whom, of course, will have to be cleared as adequate buyers by the EC.”

Once the Dust Settles

At the end of the day, “simply speaking, it was always better to have a company that’s consolidated – leading to cut costs and the streamlining of operations,” Mataczynski says. And Rymarz agrees: “This should have happened years ago, decades even. From a business perspective, it made no sense to have two state-owned companies operating in the same industry and existing separately.”

“There is still work to be done to fully implement all of the remedies and, of course, to complete the post-merger integration – though this is more operational work rather than legal,” Mataczynski says. Still, PKN Orlen does not rest, and, at the moment, there is an ongoing merger with PGNiG. “Once completed, this deal would lead to PKN Orlen growing two-and-a-half to three times in size,” he points out. The Polish regulatory authorities have given clearance quite recently, in 2022, meaning that “the intense work on the actual merger can begin. While it’s tough to predict when it will be completed, I feel that we could see it done this year,” Mataczynski says.

“The timing of the transaction turned out to be impeccable,” Rymarz adds. “With the war in Ukraine and the consequent oil and gas market problems, Poland has made a step in the right direction to diversify away from Russia-sourced oil.” This is echoed by Mataczynski: “the Polish energy structure is not quite healthy, with a high dependency on coal.” To move away from coal and Russian-based oil and gas, PKN Orlen would have to further pursue upstream integration, he says, “which is what the PGNiG merger is seeking to achieve – targeting gas extraction locations all the way up to Norway.”

Rymarz feels that going forward, PKN Orlen will only solidify its presence outside of Poland and continue to grow in an efficient manner. “PKN Orlen did a smashing job – faced with a challenging EC decision, it made the best of it and turned it into an opportunity!”

This Article was originally published in Issue 9.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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