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Doprastav wins tender for Metrostav

Doprastav, one of Slovakia's biggest construction companies, is likely to become a majority owner in the second largest Czech construction firm, Metrostav. But while the Slovak firm is seeking to improve its fortunes through the Czech expansion, analysts warn that the deal does not mean an upturn in fortunes for the Slovak construction sector in general.
Doprastav won a tender for a 62.53% stake in the Czech company in mid-August, although the purchase price offered has not yet been disclosed.
According Doprastav officials, the decision to invest into Mestrostav was taken to broaden the construction services offered by the firm, as Doprastav's main activity is currently ground construction while Metrostav specialises in underground construction and tunnel digging.

Doprastav, one of Slovakia's biggest construction companies, is likely to become a majority owner in the second largest Czech construction firm, Metrostav. But while the Slovak firm is seeking to improve its fortunes through the Czech expansion, analysts warn that the deal does not mean an upturn in fortunes for the Slovak construction sector in general.

Doprastav won a tender for a 62.53% stake in the Czech company in mid-August, although the purchase price offered has not yet been disclosed.

According Doprastav officials, the decision to invest into Mestrostav was taken to broaden the construction services offered by the firm, as Doprastav's main activity is currently ground construction while Metrostav specialises in underground construction and tunnel digging.

According to Doprastav director Ivan Šesták, the Metrostav deal was something too good to be passed up. "We realised that this chance [to buy a majority stake in Metrostav] wouldn't come again soon, and that's why we decided to bid for it [the stake]," Šesták said.

Metrostav officials, meanwhile, refused to comment on the deal until the initial payment, due by September 8, was transfered to their account. "We won't comment on anything connected with this deal, as we have bad experiences with two such previous transactions which both failed," said a Metrostav official speaking on condition of anonymity.

Metrostav owners Česká Spořitelna and Komerčn' Banka had wanted to sell the company on two occasions in the past year, but both attempts failed as neither of the interested parties was ultimately able to pay the purchase price. Swedish venture capital fund PCTC lacked the funds to pay the 765 million Czech crowns it bid, while two Czech investors who had offered about 800 million crowns were also not able to meet the payment conditions.

According to Doprastav officials, the company will cover the purchase price partially from its own sources and partially from loans.

Analysts characterised Doprastav's decision to expand as reasonable, given that the company had been too much focused on the sagging Slovak market and needed to use its spare capacity. They voiced doubt, however, over whether the company would be able to pay the purchase price.

According to Roman Matis, an analyst with J&T Securities, if Doprastav became the majority owner of Metrostav it would have the chance to win good contracts in the Czech Republic, as the country is heading towards the European Union, which is pushing the Czech government to hasten road construction. "Doprastav is a good, quality company, and is too big for the Slovak market," he said. "Moreover, expansion can only help as the firm's profits have been falling since 1997, when highway construction in Slovakia was booming. The only thing I am not sure about is whether they will be able to pay the purchase price."

Doprastav's heyday was during the government of Vladim'r Mečiar, when it gained lucrative contracts for highway construction and found its full capacity called on to help the Mečiar government realise its dream of a new highway network tying Slovakia into a north/south and east/west transport corridor with neighbouring countries.

But after Mečiar's HZDS party lost the 1998 elections, the new government of Mikuláš Dzurinda called a halt to highway construction, cutting heavily into Doprastav's profits and sending the construction industry in 1999 into a 25.8% decline in real turnover, year-on-year. The sector continued to fall by a real 11% in 1H00.

"The second half of 1998 was a small catastrophe for Doprastav as its revenues fell considerably. The situation worsened last year when the company had little revenues and high expenses. The government simply didn't pay Doprastav's invoices on time," Matis explained, adding that the situation improved somewhat after the Dzurinda government came up with a 'B variant' for highway construction that released some additional funds to the sector.

Doprastav made a net profit of 45.7 million Slovak crowns ($973,000) in 1999, which was 223 million crowns ($4.7 million) less than it made back in 1997 when highway construction reached its peak. "Doprastav needs to increase its revenues again, and this is part of the reason why it decided to invest in the Czech Republic. But with this expansion, the company will also have to deal with foreign competition coming to the construction market," Matis said.

According to Dušan Meszároš, an analyst with Commerzbank Capital Markets in Prague, Doprastav will not see a quick return on its investment in the Czech Republic because the budgets of both countries are tight, and governments don't want to invest huge finances into highway construction at the moment. "It's not like it was during the Mečiar government, when massive investments went into the sector," Meszároš said. "This [Doprastav] investment does not mean a general return to health."

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