After a busy summer and a wild autumn in 1999, eastern Slovak steel-maker VSŽ has passed a relatively calm winter in negotiations on a stand still agreement with creditors and on the entrance of a future strategic partner. Threats that former management would mount a coup to wrest control of the company from its current management have given way to a steady process of recovery and restructuring.
Consolidation has continued apace, capped by the recent merger of daughter companies VSŽ Export-Import and VSŽ Ferroenergy under the wings of VSŽ Oceĺ. The new Oceľ was turned into a joint stock company on January 1, leading the drive in VSŽ's once 120-plus company empire towards more transparent control of financial and information channels, something unknown under the management of former VSŽ czar Alexander Rezeš.
The company has also improved production levels and cash flow (see charts, page 6) over the past year. After bringing production of rolled steel products back to pre-1998 levels in May 1999, when it sold a company record of 300,000 tons, production was kept at a steady 260,000 tons per month for the remainder of the year.
VSŽ President Gabriel Eichler pronounced himself satisfied with the firm's operational results in early January, even though VSŽ, Slovakia's largest non-financial institution, made a loss of almost 1.5 billion Slovak crowns in the first nine months in 1999. While far from good, these results represented a dranatic turnaround on the disastrous year of 1998, when VSŽ lost 11.06 billion crowns and defaulted on a $35 million syndicated loan from Merrill Lynch.
The company reached another milestone at the end of last year when it started to repay interest on its loans. In November 1999, the company repaid $5 million in interest, and Eichler has declared the firm's next goal is to sort out its financial debts to the Slovak government.
Although VSŽ still lacks a stand still agreement with its nine main creditors, due to the recalcitrance of Slovakia's state-owned VÚB bank, company officials and equity analysts say the improving situation at VSŽ makes a stand still agreement almost irrelevant. "We have started to solve the issue of indebtedness, and that, we think, is more important for our creditors than the signing of the stand still agreement," said VSŽ spokesman Jozef Marko on January 19.
VSŽ is far from out of the woods, however, and must still greatly cut back on the 'non-core' activities amassed under Rezeš's leadership.
Last year, VSŽ sold its stakes in nine companies, and is in the last stages of divesting another 21 properties. The most significant sale in 1999 was that of a 57.62% stake in insurer Slovenská Investičná Poisťovňa for 82.6 million Slovak crowns. Apart from that, VSŽ auctioned off a fleet of luxury cars, aircraft, the Národná Obroda newspaper and the Sparta Praha football club.
In mid January, management of the Hungarian company Steel Works Disgyor (DAM) were given notice as well. DAM, which VSŽ privatised two years ago, had just announced the beginning of a deep restructuring process at the company; VSŽ management gave the firm three months to prove it was able to survive without being propped up. "DAM is on the list of VSŽ non-core companies, so if we find a suitable investor we will sell this company," Marko said flatly.
Going it alone
While VSŽ has stabilised its economic and financial situation, it still hasn't found a suitable strategic partner to help it make a full recovery and compete with steel giants on the European market.
The hottest candidate for investment in VSŽ remains US Steel, an American steel maker from Pittsburg. US Steel has presented two offers to VSŽ management so far, both of which have been spurned as too low.
"Even US Steel's second offer was not acceptable for VSŽ," said Marko, adding that there are now other candidates, all of them from Europe, which are competing with US Steel for VSŽ's hand. "We think that the whole process was slowed down by the time we spent neotiating US Steel's second offer," Marko said.
However, US Steel spokesman Thomas Ferrall said his firm's second offer - which neither side will disclose - was fair. "This offer is still on the table and we think it's really comprehensive," Ferrall said. "I think that at this point we've reached a lull."
According to Kamil Katrenič, an equity amalyst with Tatra Banka, price remains the sticking point. "I think that if US Steel wants to succeed it has to come with a new offer," Katrenič said.
Katrenič added that recent public statements by VSŽ President Eichler indicated that the firm was even considering abandoning its quest for an investor, at least for the year 2000. "For one thing, VSŽ has been doing quite well in its restructuring process, and for another, VSŽ management probably wants to show those interested in buying into the company that they have to put up a better offer than US Steel," Katrenič said.
Officially, neither side is buying into this theory. "We want to speed up the process of choosing a strategic partner," Marko said, adding that VSŽ realised that without a strong strategic partner it could not compete on global steel markets. "VSŽ could survive but not grow without a future investor," Marko said.
US Steel's Ferrall also said the only way VSŽ could reach its full potential was through value-added production - which meant an investor. "VSŽ is probably still a long way from being in a position to do it on their own," Ferrall said.
