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The approval of a contentious Polish energy merger by EU competition czar Margrethe Vestager — in the face of reluctance from her own staff — is a sign that European industrial policy is rapidly taking a far more political direction.
Since Vestager last year blocked a mega-merger between Alstom and Siemens in the rail sector, EU member countries such as France, Germany and Poland have launched an all-out assault against Europe’s competition enforcers, arguing the focus in Brussels should switch to the creation of bulked-up European corporate champions, rather than protecting consumers.
Publicly, Vestager has pledged to stick to her guns by prioritizing fair competition rather than corporate heavyweights designed to tackle U.S. and Chinese rivals. Most observers, however, are looking for hard evidence of how the Danish commissioner actually handles a cluster of highly politicized mergers on her desk to determine whether the pressure from Paris, Berlin and Warsaw on the supposedly impartial and all-powerful regulator in Brussels is paying off.
Poland’s government has long touted PKN Orlen’s acquisition of Grupa Lotos as a political priority that would create a regional energy champion. Vestager’s green light for this deal in July now looks like a potential watershed moment, particularly since two senior EU officials involved told POLITICO that she pushed back against serious objections from her own staff to see the deal cleared.
Senior Commission officials said the acquisition was set to be blocked, after initial antitrust assessments suggested it would harm competition in Polish fuel services like gas stations and the refueling of airliners. Vestager, however, made a top-level intervention to ensure the deal was approved, just as Warsaw wanted.
A rare kind of approval
On July 14, Brussels gave its blessing to the deal between the two state-owned companies after they committed to make concessions, including the divestment of 80 percent of Lotos’ gas stations in Poland, and the divestment of a 30 percent stake in Lotos’ refinery in Gdańsk. It was a rare decision in that it gave the green light to a deal that essentially reduced market players from two to one.
This consent from Brussels was a major turnaround. POLITICO spoke to two senior Commission officials involved in the PKN Orlen-Lotos merger and two EU officials who were not immediately involved but were aware of how it was unfolding, and all four agreed that the deal was originally on course to be blocked.
It was only very late in the probe that the Dane requested her teams design a package of remedies that would clear the way for the creation of a Polish energy champion, despite the reluctance of at least two top officials.
“It was close to being blocked as Orlen refused to cooperate. Then, there was a very strong initiative to find creative remedies,” one senior official said. A second senior official said there was “a wish to find a solution.”
Both of the senior Commission officials directly involved acknowledged strong political pressure from Poland.
Poland’s Prime Minister Mateusz Morawiecki described the PKN Orlen-Lotos deal as a bid to build a champion “with ambitions to enter other markets.” Jarosław Kaczyński, the leader of the ruling Law and Justice Party and Poland’s de facto ruler, called the deal “a question of enormous priority,” and said it aimed at “strengthening our international position.”
In an attempt to build an even bigger champion, PKN Orlen announced in July it would acquire Poland’s national gas provider PGNiG and would notify the deal to Brussels by the end of 2020.
Delicate divestments
The Commission originally feared the merger with Lotos would remove a “very strong competitor” in the retail markets for fuel and in storage services. The main problem, however, was the creation of a monopoly in the supply of fuel to gas stations.
To clear the deal, Brussels initially wanted Orlen to divest Lotos’ sole refinery in Gdańsk, but this was a deal-breaker, according to Robert Śleszyński, Orlen’s executive director for M&A.
Discussions around concessions lasted at least 18 months, according to Maciej Mataczyński, the competition lawyer who advised PKN Orlen and Lotos, and reached a stalemate in early June after Brussels concluded Orlen’s second proposal was unsatisfactory.
That’s when the Polish government asked Orlen to be more flexible, the second senior Commission official said. Mataczyński declined to give details about Warsaw’s involvement, but said it was natural the government “had a say on the ultimate scope of the remedies.”
At the same time, Vestager also pushed for a solution. And the “case team and the PKN team hammered out the remedy package,” Orlen’s lawyer said. “It had to be accepted … it was the result of the negotiations.”
The company eventually offered remedies that are now supposed to make room for a new competitor and that could boost competition from imports.
The senior Commission officials involved raised doubts about how effective these remedies would be, however. The first said they were less extensive than needed. The second acknowledged the solution was not “clear cut.”
One antitrust economist noted that the clearance of 2-to-1 mergers was very rare and stressed that the concessions could boost competition if imports can discipline Orlen. But “Imports can’t really compete,” a business analyst said, because PKN Orlen holds a strong competitive advantage with pipelines running everywhere in Poland.
Both the economist and the business analyst refused to be named because they were not allowed to discuss the deal publicly.
The first senior EU official “hoped” the company acquiring a stake in the Lotos refinery could also challenge Orlen’s position in the market.
But Orlen wants more of a partner than a competitor, and plans to swap — rather than sell — assets to comply with the EU conditions Śleszyński said. “We would like to set up a long-standing relationship with partners in other countries to expand our footprint,” he added.
When asked about the circumstances of the approval and about the assertion that Vestager intervened to avoid a block, the Commission denied any political considerations and said the deal was allowed because the remedies were meaningful.
“This transaction could only be approved thanks to the extensive remedies, mainly structural ones, offered by the parties, which should ensure that competition on these markets is preserved. As a result of the remedies, a new strong player will be established in the Polish market and new companies will be able to enter the Polish and Czech markets and compete with Orlen,” a spokesperson for the Commission said.
A precedent to watch
The clearance process coincided with the COVID-19 pandemic, the first round of the Polish presidential elections, and the budget and recovery negotiations among EU leaders. It also ran in parallel to Brussels’ attempts to prevent Warsaw from dismantling the rule of law, and a state aid probe into how Poland is funding the generation of electricity at peak hours.
Clearing the deal was a way to prevent “Brussels-bashing in Warsaw getting to a new level,” according to Piotr Arak, head of the Polish Economic Institute.
The Commission, however, insisted that Vestager did not approve PKN Orlen-Lotos just to avoid another fight with Poland. “That is not correct,” the spokesperson said. “The Commission’s review of competition cases is based on competition grounds.”
The first senior Commission official said the highly political files involving Poland “did not really play a role,” but noted that there were now other reasons for Vestager to preserve political capital as she needs wide support from national capitals as she oversees Brussels’ plans to regulate digital platforms.
The real test for Vestager’s independence now lies ahead.
The clearance could become a precedent for other political mergers — such as the Franco-Italian tie-up between cruise ship-builders Fincantieri and Chantiers de l’Atlantique — and the Commission will have to “limit the contagion,” the first senior official said.
And the Dane has to ensure the Polish champion keeps its promises.
“We are barely half way,” Orlen’s lawyer said. “We have to execute the remedies, it will be a long process, but we are confident we will be successful, and that it will be beneficial for all.”
Jan Cienski contributed reporting.
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