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Slovalco deal moves ZSNP sale closer

Three months after celebrating its 50th anniversary, the state industrial monolith, aluminium smelter Závody slovenského národného povstania (ZSNP), took a crucial step towards future consolidation as it sold a 41.5% stake in its most viable asset - daughter company Slovalco - for $76.5 million to minority shareholders Norwegian Hydro Aluminium, the world's fifth largest aluminium firm, and the European Bank for Reconstruction and Development (EBRD) on March 30.
The deal, which gave Hydro Aluminium and EBRD a combined 66% stake in Slovalco [Hydro added 5.5% to an existing 14.5% stake while the EBRD took an extra 36% on top of a previous 10% holding], was largely viewed as a pre-condition for a long-awaited ZSNP group restructuring and subsequent privatisation.
The FNM state privatisation agency expects the restructuring to start next month and the privatisation to go ahead in autumn this year. The sale, which was also the EBRD's largest investment in Slovakia, had been a pre-condition for a larger two year $80 million expansion project the EBRD and Norwegian firm (both of whom have held stakes in the firm since 1994) are to launch this year.

Three months after celebrating its 50th anniversary, the state industrial monolith, aluminium smelter Závody slovenského národného povstania (ZSNP), took a crucial step towards future consolidation as it sold a 41.5% stake in its most viable asset - daughter company Slovalco - for $76.5 million to minority shareholders Norwegian Hydro Aluminium, the world's fifth largest aluminium firm, and the European Bank for Reconstruction and Development (EBRD) on March 30.

The deal, which gave Hydro Aluminium and EBRD a combined 66% stake in Slovalco [Hydro added 5.5% to an existing 14.5% stake while the EBRD took an extra 36% on top of a previous 10% holding], was largely viewed as a pre-condition for a long-awaited ZSNP group restructuring and subsequent privatisation.

The FNM state privatisation agency expects the restructuring to start next month and the privatisation to go ahead in autumn this year. The sale, which was also the EBRD's largest investment in Slovakia, had been a pre-condition for a larger two year $80 million expansion project the EBRD and Norwegian firm (both of whom have held stakes in the firm since 1994) are to launch this year.

"Signing this deal is crucial for further development of the whole group and the future entry of a strategic investor because it will bring ZSNP the finances it needs to take further restructuring steps and attract investors," said Vladimír Dvořáček, head of strategy at the FNM, which controls 73.86% at the ZSNP group.

The deal will bring ZSNP a vital financial injection, which will be used to repay a part of ZSNP's 3.9 billion crown ($78 million) debt to a consortium of domestic banks led by Slovenská sporiteľňa (SLSP) and state-owned Všeobecná úverová banka (VÚB). ZSNP will also use part of the sale's proceeds to fund investments into environmental improvements at its plant in central Slovakia's Žiar nad Hronom.

The presence of strong financial and industrial backers in Slovalco, sector analysts said, would allow Slovalco to expand production. "Hydro Aluminium will bring new technologies for Slovalco, new customers and will help the company to get quality certificates [ISO 9000 certificates awarded by the Economy Ministry and set to EU standards for good company practice, products and management - see story page 3] more easily, as Hydro Aluminium is an acknowledged company on the world market," said Katarína Gogová, analyst with Slávia Capital brokerage house.

Bigger suitor rejected

ZSNP's stake in Slovalco had previously attracted the interest of the world's largest aluminium producer, American firm Alcoa. However, the advanced stage of negotiations with the EBRD and Hydro Aluminium as well as the prior involvement of the two investors in Slovalco persuaded the FNM to lean towards its existing shareholders rather than jeopardise a sale on the basis of what the FNM termed as only vague interest from the US firm.

"I don't think it would have made sense to have two strong market players like Hydro Aluminium and Alcoa in Slovalco. One also has to look at the history of EBRD and Hydro Aluminium in Slovalco," Dvořáček said of the decision.

Alexander Auboeck, EBRD's director for the Czech Republic and Slovakia, added: "Why should the government have jeopardised what had been achieved in one year of discussions for the vague interest of another investor? They would have had to begin from scratch [with Alcoa], and it would have been complicated."

Slovalco's financial performance is key to the health of the entire ZSNP group. In 2000 more than 64% of ZSNP's output was produced by Slovalco. Thanks to Slovalco, ZSNP's preliminary figures showed a profit of more than 2 billion crowns, 250 million crowns more than planned. Slovalco's profits rose from $10.5 million in 1999 to $24.2 million last year.

Norwegian expansion?

Hydro Aluminium has said that following the deal it may later consider buying into the EBRD's stake. The European bank has said it is likely to sell its stake in Slovalco "in a couple of years time".

"It was clear [in 1994] that the EBRD was not a long-term owner. We will probably be interested in buying the EBRD's stake and becoming a majority owner in Slovalco in the future," said Knut Preus, Hydro Aluminium vice president. He added that Hydro Aluminium might broaden its activities in the ZSNP group and had already looked at the possibility of co-operation with ZSNP's daughter company Alufinal.

With Slovalco now sold, the FNM is left with what analysts say is the somewhat trickier task of selling its remaining 73.8% stake in the ZSNP group to a strategic investor.

But according to Dvořáček, after debts are settled, ZSNP could be an attractive asset for potential buyers. "Our priority is to generate the highest revenues from the sale, we believe this is realistic, and the ZSNP group is a viable company with several interesting daughter companies worth an investor looking into," he said.

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