– The conditions negotiated by Orlen have failed us. Looking at the transaction as a whole, in our opinion they do not fully justify the current valuation of Lotos, even though some could count on a market premium, said Łukasz Prokopiuk from DM BOŚ.
Lotos is one of the cheaper companies among the companies covered by DM BOŚ, with an upside of at least 30 percent. compared to the current market price.
– I think it is a consensus that Lotos is considered a cheap company. If we took the EBITDA of the assets sold from last year’s results, included the swaps in the retail segment and the cash earned on the assets sold, the EV / EBITDA ratio for Lotos would drop from a low level of 3.4x to an even lower 3.2x, Prokopiuk said.
– We saw that yesterday Orlen shares performed well, and Lotos shares did not perform well. As for Lotos, we believe that the shares performed poorly due to the transaction valuation, as it may suggest that Orlen will not want to pay more for Lotos than is indicated by the current market prices, he added.
In the opinion of the DM BOŚ analyst, the conditions negotiated by Orlen may not satisfy Lotos’s minority shareholders and it may turn out that PKN Orlen will have to present a good exchange offer.
– The conditions negotiated by Orlen may not satisfy Lotos’s minority shareholders and perhaps it will mean that to collect 80 percent. Orlen will have to propose a really good exchange parity to obtain approval, he said.
In the opinion of Michał Kozak, an analyst at Trigon DM, initially the parameters of the transaction seemed slightly better than now, after a teleconference for analysts, which took place in the late afternoon on Wednesday. He indicates that during the teleconference it was clarified that the values presented by Orlen relate to EV amounts, i.e. in terms of debt.
– The refinery is sold cheaper than it could be calculated, and the detail is a bit more expensive. However, this should not be fully applied to Lotos’s capitalization or to the company’s fundamental valuation. The amount for the sales package is about 25 percent. less than what we valued in December in our last recommendation. This is due to the fact that it is a minority stake, so there may be significant discounts in relation to the fundamental value in the transaction, and the second thing is the rigor of the need to sell these assets, which of course affects the proposed price by the partners – said Michał Kozak.
– It does not have to mean that, with the same valuation, Orlen will approach the parity proposal. It seems to me that the implied parity values should be higher than it would appear from the offers submitted by Saudi Aramco and other entities – he added.
Łukasz Prokopiuk from DM BOŚ believes that Orlen has negotiated very good conditions for the sale of petrol stations, while they are poor for the remaining assets sold.
– On the one hand, very good conditions have been negotiated in retail, because Orlen sells Lotos fuel stations at the ratio we estimate at 11x EV / EBITDA. It is a very expensive asset, especially since Lotos stations require large capital expenditures and they are probably of lower quality. Orlen, on the other hand, buys stations from MOL in Hungary and Slovakia for 6.3x EV / EBITDA – he said.
– On the other hand, we have very poorly negotiated conditions for Lotos’ refining assets. We estimate that for a total of 30 percent. shares in the refinery plus a wholesale company, jet fuels, biofuels and asphalts Orlen will receive approximately PLN 2.5 billion. The transaction’s EV / EBITDA ratio is 2.7x, which is very low, he added.
DM BOŚ analyst points out that the assets sold generate about 40 percent. Lotos’s refining segment’s EBITDA, which implies the value of all Lotos refining assets at only PLN 6.3bn.
– PLN 6.3bn implied valuation of the refining segment is very little compared to several things: a) our valuation of Lotos, which is PLN 15bn, where the value of the refining segment is approximately 3/4 of the company’s total value, b) the current capitalization of Lotos in the amount of PLN 12 billion, c) capital expenditure incurred for the EFRA project or the 10+ program at Lotos (approximately PLN 8 billion in total), d) to the expenditure that Orlen wants to incur in Mazeikiu for the BoB installation (approximately PLN 2.9 billion ) – said Łukasz Prokopiuk.
– In our opinion, given the current conditions of the European Commission and taking into account the conditions negotiated by Orlen, the planned transaction of taking over Lotos by Orlen makes no sense from the point of view of the state – he added.
Orlen presented on Wednesday the remedial measures required by the European Commission in consent to the merger with the Lotos Group.
Orlen chose Saudi Arabian Oil Company as a partner for refining, wholesale and aviation fuel assets in connection with the planned merger with the Lotos Group. Price for 30 percent. of shares in Lotos Asfalt is to amount to approx. PLN 1.15 billion and a dependent variable element, among others on the amount of debt, and the selling price of shares in the wholesale company Lotos SPV 1 approx. PLN 1 billion and a variable element.
Hungarian MOL (MOL, WSE) will take over 417 Lotos fuel stations located in Poland for USD 610 million, and Orlen 185 stations from MOL Group’s portfolio in Hungary and Slovakia in order to implement remedial measures.
In the area of fuel logistics and asphalt markets, Grupa Lotos has concluded preliminary agreements with Unimot Investments. Agreements include, inter alia, sale of 100% shares in Lotos Terminale. The estimated involvement of Unimot in the transaction will amount to at least PLN 450 million.
In the area of the biofuels market, a preliminary 100% sale agreement was signed in the Lotos acquisition process. shares in Lotos Biopaliwa for Rossi Biofuel.
In addition, Orlen has signed a long-term contract with Saudi Arabian Oil Company for the supply of crude oil, under which it will guarantee supplies after the merger with Lotos from 200 to 337 thousand. barrels a day.
It is estimated that deliveries, after the merger of the concern with Grupa Lotos, can satisfy up to 45 percent. the total demand of the entire Orlen Group, both in Poland, Lithuania and the Czech Republic.
– These are significant amounts of the order of 20 million tons per year, here may be some savings, which Orlen does not talk about and does not want to refer to, so it is difficult to estimate them – said Michał Kozak.
On Wednesday, at the close of the session, PKN Orlen shares rose by 3.87 percent, and Lotos fell by 0.34 percent.
According to Michał Kozak from Trigon DM, there is still a potential for an increase in the price of Grupa Lotos shares, and in the case of Orlen’s share price, the market may discount it for the benefit of the merger with PGNiG, which, in his opinion, is underestimated.
– If the merger took place under the current conditions, it would add Orlen the rate. In Lotos, there is a greater requirement for approval of the general meeting (80%, in Orlen 2/3 of the votes), so the question is whether the rates may significantly break away from what has happened in recent months. It seems to me that this should not be the case. Now the waiting for the decision of the European Commission regarding the verification of remedial measures will last 2-3 months and then there will be a proposal regarding the size of the share exchange parity, which will probably take place at the turn of the first and second quarter. It seems that when approaching parity, shareholders will expect more than what was proposed in the remedial measures, the analyst said.