C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 001008
STATE FOR EUR/NB, EUR/NCE, EB/ESC
STATE PLEASE PASS TO FEDERAL TRADE COMMISSION
DOE FOR HARBERT
DOC FOR 4231/IEP/EUR/BOHIGIAN
NSC FOR GRAHAM, MCKIBBEN AND COEN
TREASURY FOR LOWERY, LEE AND COX
E.O. 12958: DECL: 11/08/2016
TAGS: ENRG EPET PREL LH RS PL
SUBJECT: EU DECISION HELPS REFINERY DEAL BUT SIGNIFICANT
REF: VILNIUS 962 AND PREVIOUS
VILNIUS 00001008 001.2 OF 002
Classified By: POL/ECON Section Chief Rebecca Dunham for reasons 1.4 (b
) and (d)
Â¶1. (C) Summary: Poland's PKN Orlen has overcome the main
legal obstacle hindering its purchase of Lithuania's Mazeikiu
Nafta oil refinery (MN) -- approval of the EU's competition
authority -- but other hurdles remain. The investigation
into the October 12 fire will not conclude before February 1,
and it is unlikely that the deal will close before then.
This time lag creates additional opportunities for other
problems to arise and still potentially spoil the deal. The
banks financing the deal are reportedly increasingly nervous
about their support for this transaction -- support which is
critical for the purchase. Problems in MN's boardroom appear
manageable, but do not help the situation. End Summary.
Good news . . .
Â¶2. (C) Emboff was in the room when MN's leadership heard the
news that the European Commission's competition authority
(DG-COMP) had approved on November 7 the sale of MN to PKN.
One of MN's lawyers read the details of the decision, whooped
with joy, and exclaimed: "this is exactly what we wanted!"
The others present expressed similar sentiment, with lots of
mutual back-slapping and congratulatory handshakes.
. . . But it's not over yet
Â¶3. (C) The GOL has announced that its investigation into the
October 12 fire will not conclude before February 1. PM
adviser Saulius Specius told us November 7 that the experts
charged with examining and analyzing the physical evidence
would complete their work only in late December, delaying the
GOL's investigation into the fire.
Â¶3. (C) PKN announced on November 8 that it expects to close
the deal "no later than February 28," but reiterated the
company's desire to complete the takeover "as soon as
possible," possibly by the end of the year. Specius told us
that PKN, MN's majority shareholder Yukos International (a
Dutch-registered company), and the GOL would all like to
close the deal by the end of the year, but admitted that the
delay in the GOL's fire investigation made this timeframe
unlikely. He also said that PKN was having some problems
with the three-bank consortium that had agreed to finance the
purchase. One member of the consortium -- Deutsche Bank --
had already pulled out of the deal, he said, but the other
two have agreed to cover the full amount of the loan. He
said he was unsure how the banks would react if the refinery
experienced any more "accidents" prior to closing.
Boardroom antics an irritant, not a deal-stopper
Â¶4. (C) MN's Amcit General Director, Nelson English, told us
on November 6 that an attempt to fire him at a November 5 MN
board meeting failed when one of the board members, due to
participate by telephone from Latvia, did not answer his
phone. English said that the board's chair (one of the three
GOL-appointed board members) then refused to call for a vote
on the motion to fire English -- a motion initiated by the
four Yukos-appointed members of the board, including the one
who didn't answer the phone. English said that he would have
preferred that the chair call for the vote, which would have
resulted in the three GOL-appointees voting against the
motion and the three Yukos appointees voting in favor,
effectively rejecting the motion. Instead, however, the
chair postponed the vote until the next board meeting, slated
to take place November 9 at 1800 hrs local. English said
that he hoped that the GOL would instruct its appointees to
avoid the meeting, preventing the quorum necessary to have
Â¶5. (C) Specius told us November 9 that the GOL had indeed
instructed its appointees to stay away from the meeting. He
also said that even if the management board voted to fire
English, the supervisory board was unlikely to confirm this
VILNIUS 00001008 002.2 OF 002
decision, which would also spare English's job.
Â¶6. (C) English received public votes of support from both the
PM and Minister of Economy this week. Foreign Minister
Vaitiekunas told the Ambassador November 9 that he also
advocated strongly at a cabinet meeting in favor of keeping
English at the helm of MN.
Â¶7. (C) English, Specius, and Yukos executives have told us
that the Yukos-appointed board members are "out of control."
Yukos International has announced a shareholders' meeting on
December 4 or 14. Both English and Specius said that the
main purpose of the meeting will be to appoint new directors
to MN's management board.
Another problem on the horizon?
Â¶8. (C) Specius said that a new problem with the PKN purchase
had just surfaced involving a power plant adjacent to the
refinery. MN purchased the plant last year and operates it
as a subsidiary. Unfortunately, said Specius, the plant runs
on heavy fuel oil produced by the refinery, resulting in
emissions that violate environmental standards. To bring the
plant into compliance, MN devised a corporate restructuring
plan that would make the plant an integral part of the
refinery. Calculated as a single corporate unit, the
refinery/power plant's emissions would not exceed allowed
polluting limits. MN's board has approved this plan, which
shareholders need to approve at the next meeting.
Â¶9. (C) The problem, Specius said, is that PKN opposes this
restructuring plan because it will increase the number of MN
shares. PKN's lawyers believe that this will give Eduard
Rebgun, the bankruptcy trustee appointed by a Russian
bankruptcy court to administer the assets still held by
Russia-based Yukos Oil, legal grounds to re-open the Chapter
15 bankruptcy case Rebgun filed in New York in April. (That
case resulted in a temporary restraining order preventing
Yukos International executives from signing any deal
involving the transfer of MN shares. The judge lifted the
restraining order on May 25.) Specius said that he needed to
learn more about the potential problems associated with this
restructuring plan, but emphasized that the GOL had made a
mistake in approving it.
Â¶10. (C) The EU's approval of PKN's purchase of MN was a rare
bit of unambiguous good news for the refinery in recent
weeks, and the GOL's apparent rallying around English is also
helpful in bringing the deal to closure. Unfortunately, this
deal is still far from complete. Every additional delay and
problem contribute to the complexity of this deal and hinder
its closure, and the fact that the deal is unlikely to close
until February gives plenty of opportunities for additional
problems to arise.