Hungarian Competition Authority

Vj-123/2001/

The acquisition of control over BorsodChem Rt by CE Oil ;amp; Gas Beteiligung und Verwaltung

The OEC approved the acquisition of control over BorsodChem Rt by CE Oil ;amp; Gas Beteiligung und Verwaltung AG (hereinafter CEOG).

The notification

The CEOG intended to raise its 16.06% share in BorsodChem over 51% and made a public offer for the shares owned by other undertakings. The openness of the offer was required by Act no. CXI of 1996. CEOG made the purchase of the offered shares subject to several conditions such as: a) the unconditional authorisation of the concentration by the OEC b) the authorisations from all affected competition authorities c) the transaction makes possible to rise its share over 50%.

The parties undertook to inform the OEC about the proceedings of the Austrian, Czech, and Slovakian competition authorities.

The Parties

CEOG is the member of the Vienna Capital Partners (VCP) group which is directed by the VCP Holding AG. CEOG is controlled by its 100% owner CEE Oil ;amp; Gas GmbH. CEE is indirectly owned by VCP Holding AG through VCP Capital Partners. CEOG owns the 15.74% of the Hungarian chemical factory TVK.

BorsodChem was established in 1949 as a public company and was first privatised in 1996. Today it is one of the leader chemical companies in the Eastern-Central European region. It produces basic materials for plastic production.
BorsodChem controls its 10 affiliated companies and beside has a share of 97,5 per cent in the Czech undertaking BC-MCHZ and a share of 66.67 per cent in BorsodChem Krems Chemie Formalin Kft. At the end of 2000 Milford Holdings Ltd hold the largest share in BorsodChem (24.79 per cent). The Bank of New York had 11.46 per cent, and EBRD had 8.61 per cent. Other foreign and Hungarian entities hold 38.92 per cent in the company. At the beginning of 2001 the CIB Bank bought the shares of Milford Holdings Ltd and sold them to the Russian Szibur company. At the same time the shares of the Russian MDM Bank and the Bank of New York decreased.
The annual turnover of BorsodChem was 86 billion HUF in 2000.

Other undertakings concerned by the concentration

There are three important undertakings on the market of the Hungarian chemical industry, BorsodChem, MOL and TVK.

TVK is a group of 30 undertakings. TVK is the leader chemical company in the Central-European Region. It holds the 20 per cent of the capacity of this region. It is the biggest chemical complex of Hungary and the only producer of polyolefin. It also produces ethylene, propylene, polyethylene and polypropylene.
TVK`s largest shareholder is MOL with its 32.9 per cent. In September 2000 and March 2001 MOL acquired option for the shares of MK Bank and Deutsche Bank (17.8 per cent altogether).

In May 2001 MOL made a public offer for the shares of TVK owned by other entities. In the business plan attached to the offer, MOL undertook to support the development of TVK through the enlargement of the olefin producing capacities and the construction of a new polyethylene factory.

MOL is owned in 25 per cent by the Hungarian Privatisation and State Holding Company, but the majority of the shares are handled by investment funds, such as the Bank of New York and the Capital Emerging Markets Growth Fund. The biggest known professional investor is the OMV with a share of 9.3%. Under the constitution of the MOL no-one except the Hungarian state may hold more than 10 per cent of the voting rights.

Two large groups are keenly interested in the Hungarian chemical industry. The first is the Russian Gazprom group that acts in Hungary through the Szibur company and the second is the Anglo-American investor group that stands behind MOL. There is no public relation between these two groups.
Gazprom is the world`s biggest gas producer company. It produces the 94 per cent of Russia`s and 23 per cent of the world`s overall gas production. Gazprom owns 51 per cent in Szibur.

Sergei Zenkin representative of Szibur and member of board of directors of the BorsodChem suggested to MOL, the main controller of TVK to enforce closer co-operation between BorsodChem, the main purchaser of ethylene and TVK the only ethylene producer in Hungary. The suggestion included even the merger of the these two companies.

The relevant markets

In its seat at Kazincbarcika BorsodChem is active in four branches.

• a)

  VCM unit

  BorsodChem produces materials for the vinyl-chloride monomer branch. This means that it produces chlorine, alkali and vinyl-chloride. Its annual production is 190.000 tonne vinyl-chloride (1998) and 125,000 tonne chlorine (1999).

• b)

  CPE unit

  This unit includes the production of dry blends and granules for the production of rigid PVC films and sheets, construction application and other profiles, pipes, cable sheathings, injection moulded products and bottles as well as chlorinated polyethylene applied as substantial plastic additive (CPE).

• c)

  Polyurethane unit

  This unit includes an MDI facility of 60,000 tonne per year capacity which was built with the help of the Japanese Mitsui Toatsu chemicals Inc for the production of crude, pure and modified MDI. Based on these isocyanates there is also a possibility for the production of polyether and polyester prepolymers. Crude MDI is primarily used in manufacturing rigid insulation foams for construction and refrigerator industries. Main customers of the pure and modified MDI are the shoe industry firms.

• d)

  PVC unit

  This unit produces the main product of the company, the S-PVC powder. Its annual capacity is 320,000 tonne per year.

The most important basic material of the PVC production is the ethylene. Ethylene is usually transported in a liquid physical condition through pipelines or by tankers but this latter is accident risky so not preferred in the EU. The ethylene claim of BorsodChem is increasing as this material is necessary for the work of its branches.
BorsodChem receives ethylene from Ukraine, through a pipeline that touches TVK as well. Under the present practice the Ukraine company sells ethylene to TVK and BorsodChem purchase it from TVK. BorsodChem also purchases ethylene from the Czech republic and Yugoslavia. This latter possibility is not available since 1998.
Other necessary basic materials are imported from Ukraine, Germany, North America etc.

In May 2000 BorsodChem in exchange for bonds issued by itself increased its share in TVK to 29.9 per cent. Later it sold 14.5 per cent to MOL and MK Bank Rt.
BorsodChem increased its MDI production and started the construction with the help and licence of Mitsui Chemicals Inc of a new TDI producer factory in 2000 and plans, together with MOL and ÉMÁSZ (North-Hungarian Electricity) the construction of a new power plant.
BorsodChem plans acquisitions to ensure the future supply of its productive capacities with basic materials.

The major sub-markets affected by the concentration were as follows:

• a)

  basic materials for the production of plastic (PVC, EPS)

• b)

  organic materials (MDI, TDI)

• c)

  inorganic materials (chlorine, hydrochloric acid, potash, ammonia)

The most important vertically connected market was the market of ethylene.

The geographic market was defined as Hungary. The Competition Council took into consideration the possible extension of the geographic market to the EU and the whole Eastern-Central European region, where BorsodChem supplied but later it refused the application of such market conception. It considered that the geographic market should be defined under the following, previously elaborated principles: a) the products present in the affected market parts should be close substitutes b) the ability of the parties to distort competition in Hungary through their activity on all parts of the relevant geographic market should be proved. Although BorsodChem has a strong export activity, its shares on the foreign markets are not high enough to enable it to distort competition on the Hungarian market through its activity abroad.

Mandatory notification

As through the transaction CEOG acquires control over BorsodChem and the legal turnover thresholds were also exceeded the transaction was covered by the rules of the Competition Act. Therefore the notification of the planned transaction was mandatory.

Effects of the concentration on the Hungarian market

Financial investors usually do not have share on the relevant market and therefore the concentration does not change on it. This means that the effects of such concentrations appear on other markets.

The Competition Council established that BorsodChem is present on the market of several products with shares from 12.25 to 100 per cent. The Competition Council examined whether on the markets where its share is determinant it has a dominant position to distort competition or not. The Competition Council established that on the market of inorganic materials (chlorine, hydrochloric acid, potash, ammonia) BorsodChem did have such position as there were no competitors or new entrants on the market.
On the other relevant markets domestic undertakings and import products are also present and therefore dominant position does not exist on these markets.

The Competition Council established that as BorsodChem has an important role in the Hungarian national economy, the concentration should be examined from this point of view as well. Therefore possible changes in the business policy and the economic strategy were also examined.

The Competition Council posed the following questions:

• a)

  did the investor plans the modification of the long term development plan of BorsodChem?

• b)

  if the answer for this question was yes than what would be the substance of the modifications, and what kind of assets and sources were planned to use for it?

• c)

  what was the reason for the replacement of almost the whole board of directors, taking into account especially that this caused the cancellation of the long term contract with TVK on the purchase of ethylene?

• d)

  how does the new owner plans future relationships with TVK?

• e)

  what was be the effects of the replacement of almost the whole board of directors on the relationships with Mitsui Chemicals Inc with special regards the planned new TDI producing factory?

• f)

  were there any relationship among CEOG or any of its executive officials and Szibur or Gazprom?

The Competition Council got the following answers:

• a)

  the investor did not want to modify the long term development plan of BorsodChem,

• b)

  the investor intended to reduce the dependence of BorsodChem on the import of vinyl chloride,

• c)

  members of the board of directors were removed as it was required by the changed structure of the ownership. The long term contract on the purchase of ethylene was not favourable for the company and went against international norms. The new board of directors immediately started consultations on a new agreement with TVK,

• d)

  the investor intended to continue the co-operation with TVK,

• e)

  the changes in the board of directors did not disturb the business relations with Mitsui Chemicals Inc

• f)

  there was close relationship between CEOG and Szibur because of the latter`s strategic role in the gas sector and its intents for acquisition of control in the Hungarian chemical sector.

The Competition Council examined the possible changes in the degree of supply of ethylene in Hungary and established that:

• -

  the ethylene production of TVK would rise significantly until the mid of 2004,

• -

  BorsodChem would also increase its vinyl-chlorine production until this date,

• -

  the Ukraine ethylene producer would ensure on the short term the increased demand of BorsodChem for ethylene,

• -

  the Czech Unipetrol would decrease its ethylene supply to Hungary in the future,

• -

  the Yugoslavian ethylene producer and processor factory in Pancevo would supply ethylene in Hungary on the short run, as its ethylene processor capacities were damaged by the NATO air strikes and need repairing,

• -

  MOL would rationalise its ethylene production capacities at TVK and Slovnaft,

• -

  Szibur and BorsodChem probably with MOL and TVK would be able to establish a new ethylene factory in Hungary.

The Competition Council took into consideration that the Austrian, the Czech and the Slovakian competition authorities approved the concentration.

Following thorough investigation taking into account all the facts presented above the Competition Council considered that the planned merger would not create or strengthen dominant position and would not prevent or distort competition on the relevant market. The concentration would make BorsodChem more competitive on international markets through the decrease of the internal competition on certain markets.

The Competition Council examined the positive effects of the concentration as the possibility of the creation of dominance in relation with certain inorganic materials could not been excluded. It established that the planned strategy of the post merger entity aiming co-operation with TVK, MOL and Szibur would create the largest ethylene producing capacity of Central Europe and BorsodChem could compete with the multinational groups present at the market. The Competition Council considered that this advantage surpasses the possible decrease of competition on certain sub markets.

The parties underlined that CEOG as a financial investor did not intend structural changes in BorsodChem and it aimed only the acquisition of control over the company as a buy-out investment. The parties submitted that the result of the changes in the chemical sector would be the creation of a clearer and more stable structure.

October 9, 2001. Budapest

dr. Bara Zoltán sk. előadó
dr. Bodócsi András sk.
dr. Tóth Tihamér sk.