International Acquisition Business Plan

Mihajlo Borozanov Page 1

THE MULTINATIONAL ENTERPRISE

Dr. Khaled Soufani

INTERNATIONAL ACQUISITION BUSINESS PLAN

Mihajlo Borozanov

Matrikel Nr.0764267


Contents EXECUTIVE SUMMARY ........................................................................................................... 3 THE ACQUIRER AND ITS ENVIRONMENT 3

ACQUIRER’S STRATEGY AND PROPOSAL 4

ACHIEVEMENT OF GOALS AND ACQUISITION DETAILS 5 ACCOMPLISHMENT OF ACQUISITION 5 POST-ACQUISITION MEASURES 6 INDUSTRY AND MARKET DEFINITION 6 INDUSTRY DEFINITION 6 BRIEF MARKET DEFINITION 7 INTERNAL ANALYSIS 8 STRENGTHS 8

WEAKNESSES 9 OPPORTUNITIES/THREATS 10

CORPORATE STRATEGY 12 SHORT PROFILE OF MAKPETROL (THE TARGET COMPANY) 13

FINANCIAL VALUATION OF MAKPETROL (THE TARGET COMPANY) 14

INTEGRATION PLAN 17


Executive summary

The acquirer and its environment

OMV, headquartered in Vienna, is one of Austria’s largest listed industrial companies and the

leading energy group along the European growth belt. The company is present in 17 countries in

the Exploration and Production business segment.OMV integrates 41,282employees and a

network of over 2,696 filling stations and five refineries. As international integrated energy

group OMV is active in the following core businesses areas: Refining and Marketing including

Petrochemicals (R&M) Exploration and Production (E&P) as well as Gas and Power (G&P).

OMV’s Refining &Marketing business segment is market leader along the European growth belt

–a region with a population of several million people. OMV currently operates a network

consisting of 2469 filling stations. OMV operates a refinery in Scwechat(Austria), Burghausen

(Germany). Along with the refineries Petrobrazi and Arpechim (Romania) and its 45% stake in

Raffinerieverbund Bayernoil (South Germany) OMV has a total annual capacity of 26 million

tons.

OMV Gas and Power business segment sells an annual gas volume of approximately 13bcm. Its

objective is to increase total gas sales to 20 bcm by 2010. OMV therefore represents a central gas

hub.

In the Exploration and Production business segment OMV is active in 17 countries worldwide.

Daily production amounts to 317,000 boe/d. in Europe.

OMV’s goal ‘is to actively shape the energy industry in the European growth belt. We (OMV)

plan to do this by further extending our leading position in oil and gas, by unlocking additional


resources available in our market and in neighboring regions and by moving selectively beyond

our core business and investing in the Power business

OMV Main Facts and Figures 2008 Work force: 41,282

Revenues:

EUR 25,543 million

Operating result:

EUR 2,340 million

Net profit: EUR 1,529 million

Cash flow: EUR 3,214 million

Acquirer’s strategy and proposal

OMV has established itself as the leading oil and gas Corporation in Central Europe. OMV

global strategy is framed in operating at 3 business segments: Refining & Marketing (R&M)

Exploration & Production (E&P) and Gas & Power (G&P) and three growth markets – CEE,

SEE and Turkey. In order to maintain its leading position in Central and Eastern Europe and

follow its growth strategy the possibility for acquiring more energy companies in the region is

continually analyzed and examined. In this context the potential presence in the Macedonian

market was also examined and the entrance in the market through MAKPETROL AD – the

largest petroleum and gas wholesale and retail company and bio fuels producer in Macedonia

and one of the very few petrol and energy companies in the CEE region where there is no

significant amount of foreign ownership in the capital structure present.


Achievement of goals and acquisition details Considering the favourable and strong position in the CEE region, the strategy to maintain and

improve its presence in the region and the favourable financial data for 2008 that provides

opportunity for acquiring 51% of MAKPETROL in order to get synergies from the acquisition.

The financial position of OVN would offer two options for the acquisition: cash or a loan. The

loan could decrease the debt/equity ratio of OMV and could theoretically decrease the rating of

the OMV holding which will lead to increased interest expenses. On the other hand OMV has

more than 1.5 billion € net profit in 2008 and positive cash flow exceeding 3.2 billion €, liquid

funds that could be used more efficiently by investing in projects like acquiring MAKPETROL

in this case.

The potential benefits that MAKPETROL offers to OMV are the following:

• more than 60% of the energy market share in Macedonia and the position of former

natural monopolist in its home country

• balanced energy mix between the fossil fuels and the renewable energy sources (bio

fuels) that is in accordance with OMV’s global strategy

• expertise in the local market and better overview in the neighbouring markets

(MAKPETROL has tight historical business connections on all the neighbouring

countries markets and OVN can use this position for better screening of the regional

market and a base for the decision process about making more significant investments in

the market in the neighbouring countries in general.

Accomplishment of acquisition When negotiating the price of the takeover The Zone of Possible Agreements (ZOPA) will be

calculated where the range of the possible price offers will be considered based on the potential

synergy gains. Upfront meetings will be held with the existing management to show that OMV is

not interested in hostile takeover and to make the process transparent.


Post-acquisition measures After the acquisition, an integration plan will be implemented, focused mainly on the integration

of the new employees which will represent top priority for OMV’s management. The emphasis

will be on the evaluation of their performance and organizing training programs to enable the

employees to recognize the advantage of being part of one of the top employers in Austria.

Industry and market definition Industry definition The deregulation of the energy market – extension of competition, reduction of internal and

external political intervention and regulatory measures such as removal of barrier entry for new

competitors – is a worldwide phenomenon. Two main reasons for the deregulation of the energy

market are to assure security of supply and lower prices for private customers.

This deregulation also caused a structure change in the value added chain separating energy

production from distribution.


Brief market definition

As presented in Figure 2 OMV is present in 3 major growth markets - plus in the supply regions

to secure the supply in the markets.

OMV has the vision to shape the energy industry in the European Growth Belt by

expanding downstream within its growth markets and connecting to supply regions,


adapting the corporate portfolio by strengthening Exploration & Power and Gas & Power

businesses and through selective investments in electrical power and renewable energy, and

realizing cost and revenue synergies through an integrated position and rigorous cost and capital

discipline.

Internal analysis

STRENGTHS

Diversification

OMV is diversifying in different markets. They do not focus on their region only, but are

looking for markets in other countries as well. One example is the Austrian market. In case of a

slow-down in one market or region, they aren’t dependant on this one market only. With a

diversification strategy they are able to soften the effect on their company results at least a bit.

Implementation of Cost saving programs

OMV intents to continue to implement the ongoing cost saving programs, aimed at a group-wide

reduction in costs of EUR 300 mn as compared to 2007.

Unique growth strategy

OMV strategic framework for sustainable growth is the “3plus” strategy. This seeks to make the

most of the integration and expansion potential of ‘the three main businesses segments (E&P,

R&M and G&P) and the growth potential of our three markets (Central Europe, Southeastern

Europe and Turkey), drawing on three values (Professionals, Pioneers, Partners). The expertise

and the integration of the operations are one of the company’s strongest competitive advantages.

Experience in politically sensitive countries/areas

The know-how of operating in politically ‘complex’ countries presents an advantage especially

in the region of Southern Eastern Europe.


WEAKNESSES CEE countries diversification

In general diversification is one of the competitive advantages of OMV as previously mentioned.

Still, OMV’s refineries are concentrated in Austria, Germany and Romania, and even though

OMV is market leader in the Central and Eastern Europe, its presence in the former Yugoslavia

countries; like Macedonia where there is no presence at all with petrol stations could be more

significant in order to create an entry barrier for OMV’s other potential competitors. If OMV

does not use its leading position in the CEE region it could face competition and difficulties to

maintain its leading status.

Technical equipment

Operations require complex and highly specialized technical equipment. This equipment is very

expensive and it is highly problematic if something goes wrong and has to be maintained. In

addition also a costly, adequate insurance is needed.

Energy production

The effects of fossil energy generation on the climate are also subject of public debate. European

Union requires that the energy suppliers need to increase the share of renewable energies in their

generation portfolio substantially.

This will lead to heavy capital expenditures in the future increasing risks in OMV’s actual

position and market share.

OPPORTUNITIES/THREATS

THREATS

Petrol prices volatility

The volatility of the oil prices is influencing OMV’s operations both as cost input as well as the

final price of the product output.

Deregulation


As the European Union is trying to deregulate the market further, it is difficult for existing

companies to assess what the future will bring. The deregulation could bring more and new

entrants into the market what increases the existing competition even more. Even if this is a

positive aspect for customers, it need not be advantage for companies that are in the business.

CO2 trading system

The issue of the allocation of CO2 emissions is an important one. One risk still is that all the

companies don’t know what volume has been allocated to them until they receive their allowance

notice. This leads to a certain uncertainty in the planning costs that are needed to purchase CO2

emission allowances.

Anti-trust regulations

Anti-trust and regulatory measures increased in the past and will be tightened up further. This

increases competition and limits to a certain market power.

Changing market prices

Trading and distribution activities of companies in the market are exposed to market price risks.

One special risk is the risk of increasing fuel prices what would have significant effects on

OMV’s cost structure.

OPPORTUNITIES

Hedging

Opportunity exists for OMV using hedging to reduce risk – risk of changing market prices,

changing fuel prices, and interest and currency risks. OMV has the advantage of owning its own

refineries and petrol stations in different countries that provides the opportunity for hedging or

taking different approaches to the different markets exposure.

Focus on R&D

Further work in the segment of research and development can extend OMV’s lead in the regions

present and gives them the opportunity to attract more customers.

Recognizing the changing demand patterns

OMV’s markets are heading for fundamental changes in demand patterns. OMV’s board of

management recognizes that and has adapted their expectations in their last annual report for

2009. OMV expects the following:‘ Oil demand to contract in Central Europe, but to expand in


Southeastern Europe and Turkey; Demand for gas and power to climb in all of our markets; Our

long-term forecasts are also based on the assumption that the demands for CO2 emission

reductions to meet global or at least European climate targets will become more stringent’.

CORPORATE STRATEGY

OMV has positioned itself as an integrated market leader in the European Growth Belt using a

strategy that combines and applies the “3 Plus” assets of OMV as already mentioned. In

accordance with this main strategy are prioritizing foreign direct investments. All investments

are made on the assumption that they will contribute to the long term, value-based growth of the

company. Integral part of OMV’s business strategy is reinforcing its presence in the Central and

Southeast Europe and maintaining the leading status in the region. Looking at the consolidated

statement of cash flows and the total investments made in 2009 exceeding the amount of 2.74

billion Euros are a proof that OMV’s operational investment policy is focused on growing

through investments and acquisitions. OMV’s strategy is to continue the significant investments

policy in and the main goal is to strengthen the market leadership with 20% market share in

Central and Southeastern Europe, and increase the company’s profitability.

A growth strategy through foreign direct investments, specifically by acquisitions, is the right

strategy for OMV because of the following reasons:

• Foreign direct investments provide controlling interest in a foreign company that enables

opportunity for restructuring the new companies and fitting them according to the

existing OMV strategy

• Liberalization of the European energy markets with several key players in the single

countries. This means that barrier entries are lower but national markets are saturated.

Growth is only possible by acquisition.


• Public policy makers require the single energy companies to invest in renewable energy.

This can be achieved by investing in new projects or investing in other energy

companies, which are present in the sector of renewable energy.

• Business alliances can increase the distribution network of the company and can help to

increase profits and strengthen the market position.

SHORT PROFILE OF MAKPETROL (THE TARGET COMPANY)

MAKPETROL AD is the largest petroleum wholesale/retail company in Macedonia, the biggest

natural gas wholesaler in Macedonia and a company that is also present in the renewable

energies as a bio fuel producer. It is privately owned company with 112 500 shares dispersed at

different owners. The management team have concentrated approximately 20 % of the shares.

Nominal share value 511,29 EUR

Outstanding shares total : 112382

Nominal total share value: 57459792,78 EUR

It operates 116 petrol stations in the whole territory of Macedonia that are continually

modernised and is focused on following the modern global trends in the petroleum retail

industry. MAKPETROL also operates warehouses in total capacity exceeding 150 000 cubic

meters, 2 installations for supplying jet fuel.

MAKPETROL build the largest biodiesel production facility in Macedonia with annual capacity

of 30 000 tons. Together with the government of Republic of Macedonia in 2006 a joint stock

company was established to manage the distribution of the natural gas in Macedonia.

Makpetrol is also the largest retailer of LPG in the country and recently started producing its own

motor oil for commercial use. Compared to OMV, MAKPETROL is significantly smaller

company but the fact that it is dispersed in different segments of the energy market in

Macedonia, and due to the fact that Macedonia is small market where the infrastructure

considering the location of the petrol stations per se is already owned by Makpetrol and the


situation that OMV is still not present in Macedonia and maintaining the leadership status in the

Southern Eastern Europe is official strategic target of OMV make MAKPETROL an acquisition

target

FINANCIAL VALUATION OF MAKPETROL (THE TARGET COMPANY)

The average price in May 2010 for Makpetrol's shares is 500 EUR and at this point is very

similar to the nominal share value of 511.29 EUR. In order to assess the market valuation OMV

have made their own financial valuation using the Capital Cash Flow method in order to make

the purchase estimate and offer. The projections are based on the data from 31.12.2008 as the

latest official data from the audited reports available at the moment. These data are used as

starting point.


PROJECTIONS

MAKPETROL SELECTED FINANCIAL DATA

31 December 2008 (000 MKD) 2009 2010 2011 2012 2013

Sales 23,938,652 17,953,989 19,749,388 21,724,327 23,896,759 26,286,435

Other operating income 179,279 143,423 157,766 173,542 190,896 209,986

Supplies and consumables ‐250,837 ‐200,670 ‐220,737 ‐242,810 ‐267,091 ‐293,800

Cost of trade goods sold ‐

21,811,131 ‐16,358,348 ‐17,994,183 ‐19,793,601 ‐21,772,962 ‐23,950,258

Expenses for employees ‐1,036,138 ‐1,087,945 ‐870,356 ‐887,763 ‐905,518 ‐923,629

Depreciation ‐189,718 ‐208,690 ‐214,950 ‐221,399 ‐228,041 ‐234,882

Other operating expenses ‐584,799 ‐438,599 ‐482,459 ‐530,705 ‐583,776 ‐642,153

Changes in inventories ‐5,225 ‐6,000 ‐7,000 ‐8,000 ‐5,000 ‐5,000

Profit from operations 240,083 ‐202,840 117,468 213,590 325,268 446,699

Financial income 120,310 84,217 92,639 101,903 112,093 123,302

Financial (expenses) ‐57,130 ‐59,987 ‐65,985 ‐72,584 ‐79,842 ‐87,826

Financial result, net 63,180 24,231 26,654 29,319 32,251 35,476

Profit before tax 303,263 ‐178,609 144,122 242,909 357,519 482,175

Income tax ‐40,794 0 129,710 218,618 321,767 433,958

Profit for the year 262,469 ‐178,609 273,831 461,527 679,286 916,133

Cash Flow available 35,820 ‐23,219 35,598 59,999 88,307 119,097


CAPITAL CASH FLOW METHOD VALUATIONCash Flow available 35,820 ‐23,219 35,598 59,999 88,307 119,097Interest ‐57,130 ‐59,987 ‐65,985 ‐72,584 ‐79,842 ‐87,826Capital cash flow 92,950 36,767 101,583 132,582 168,149 206,923Discount factor 0.93 0.86 0.80 0.74 0.69 0.64Present value 86,183 31,609 80,973 97,988 115,228 131,475

VALUATION Growth rate 1% 3% 5% Present values: 543,456Terminal values in MKD 2,828,110 3,674,539 7,063,929 Terminal values in EUR 45,985,533 59,748,610 114,860,632 Enterprise value in MKD 3,371,566 4,217,996 7,607,385 Enterprise value in EUR 54,822,217 68,585,295 123,697,317 Less :debt in MKD 702,655 702,655 702,655 Less :debt in EUR 11,425,285 11,425,285 11,425,285 Equity value in MKD 2,668,911 3,515,341 6,904,730 Equity value in EUR 43,396,933 57,160,010 112,272,033

Risk free rate 7.36%Asset Beta 1Average investment grade, speculative grade (BBB, BB) 11.60%Market -risk premium 4.24%Expected asset return 7.8518%

Compared to the current enterprise value of (500*112382) = 56191000 EUR we see that the

growth rate scenarios of 3% and 5 % significantly exceed the current market value (and

acquisition synergies are not taken into account) so a zone of possible agreements will be

calculated ZOPA when the purchase offer is made in this range. OMV will bid for 51% of the

shares as according to OMV’s strategy OMV investment policy considering foreign direct

investments is focused on ownership control so the values of OMV group can be incorporated in

the newly acquired companies.

51% shares * 123,697,317 = 63,085,632 EUR

ZOPA 51% shares x 54,822,217 = 27,959,331 EUR

Due to the sufficient cash resources and for the reason not and the potential threat that additional

loans to finance an acquisition would increase the costs of debt and decrease the rating of the

group OMV’s management should use its cash resources to finance the international acquisition.

In my opinion after the decision of finding the appropriate target company for the international

acquisition the most important step is the negotiation about the price. OMV should use

transparent approach and contact MAKPETROL’s management directly and agree to a price

between the ranges presented above, of course inclining to the lower range.

INTEGRATION PLAN The integration of the new employees will represent a top priority. This will be realized through

assessment of their operations and organizing training programs.

They will be informed of the advantages of being a part of one of the biggest energy firms in

Austria and one of the top employers in the country.

In the same time they will be reassured that their positions will be valued only on their results

and that entrepreneurial employee culture will be encouraged as in all OMV companies.

This information will also be proceeded to the existing management of OMV and transparently

explain the process in order to prevent creating a hostile climate in the acquisition process as a

reaction of the fear of loosing their positions.


OMV will leave most day-to-day operations of MAKPETROL autonomous and only selected

corporate functions will be merged in order to achieve staffing synergies and cost efficiencies.


R&D departments will be merged in order to unify the future corporate strategy and use the

know-how-transfer primarily in alternative fuels which are OMV’s priorities in the future

corporate strategy.

The emphasis will be on the transfer of the knowledge and a new team will be formed with

assistance of the IT departments in order to make the process fast and effective.

After the transfer of all the relevant data in the OMV’s IT department further analysis will be

made considering the future development and possible changes in the structure

Documents

International Acquisition Business Plan