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VSŽ deal pays OECD dividends

A US about-face on its support for Slovakia's entry to the Organisation for Economic Cooperation and Development (OECD), less than 24 hours after a crucial strategic investment deal was given the go-ahead, left both US and Slovak government officials robustly denying that Slovakia was prostituting its top firms to buy its way into western organisations.
Shareholders' approval of a Memorandum of Understanding on the sale of the eastern Slovak steel maker VSŽ Košice to Pittsburg-based steel giant US Steel on May 25 was followed on the following morning by an announcement from US Chargé d'Affaires in Slovakia, Douglas Hengel, spelling out US support for the OECD entry.


Shareholder approval of a deal between steelmakers VSŽ and US Steel will see the former's core operations (above) bought out by the latter.
Photo: TASR

A US about-face on its support for Slovakia's entry to the Organisation for Economic Cooperation and Development (OECD), less than 24 hours after a crucial strategic investment deal was given the go-ahead, left both US and Slovak government officials robustly denying that Slovakia was prostituting its top firms to buy its way into western organisations.

Shareholders' approval of a Memorandum of Understanding on the sale of the eastern Slovak steel maker VSŽ Košice to Pittsburg-based steel giant US Steel on May 25 was followed on the following morning by an announcement from US Chargé d'Affaires in Slovakia, Douglas Hengel, spelling out US support for the OECD entry.

The move was a u-turn on the US stance two weeks ago when the Americans voiced concerns that Slovakia's reform process was stalling and that it was economically unprepared for OECD membership, saying that the timing of Slovakia's entry to the group should be reconsidered. Slovakia, until then, had been expected to be invited to join the organisation in July this year.

The US Steel-VSŽ deal has been criticised for both the amount of money VSŽ will receive from the deal - $60 million with a further $25-$75 million in either 2002 or 2003 - and the removal of VSZ's core steel activities from the company to form a new firm to be entirely owned by US Steel.

Both Slovak and American officials immediately denied any connection between the deal's approval and the US support.

Prime Minister Mikuláš Dzurinda stressed instead the importance of US Steel's presence in the country. "It [the shareholders' approval] is a great message for the [Košice] region, for VSŽ and its employees," he said.

Deputy Premier for the Economy Ivan Mikloš, who had flown out to Washington to plead the Slovak case for OECD entry on May 16, said that his discussions with government officials in the US had not touched on the issue of US Steel's plans and had centred on Slovakia's improving macroeconomic situation.

The central bank said May 19 that foreign debt per capita had dropped to $1,900 and in total to $10 billion - a fall of 1% as opposed to previous years where it had risen by as much as 30%. Figures released for April's trade balance showed that the month recorded the first positive trade balance for four and half years, with the government also pointing to an 8% growth of both exports and industrial production in each of the last two months.

"We disscused other issues, not US Steel's entry into VSŽ," Mikloš said. He added that the US decision to support Slovakia's entry bid to the OECD had already been made before the shareholders meeting in Košice.

"The decision was made three days before it was officialy presented by the US embassy in Bratislava, which means two days before the shareholders' meeting," Mikloš said.

Analysts believed that the link between the two events was little more than a coincidence. Dušan Meszáros, an analyst with Commerzbank Capital Markets in Prague, said: "US representatives changed their mind and decided to support Slovakia's entry into the OECD because of the government's economic plans."

In the run-up to the VSŽ shareholders' meeting, the government had virtually guaranteed the approval of the memorandum after using other state-controlled bodies to secure the votes of more than 50% of the shareholders.

According to Privatisation Minister Mária Machová, the government invested 660 million crowns in buying VSŽ shares, mainly through the state-owned utility Transpetrol. Six days before the shareholders meeting, Transpetrol owned a 21.24% stake in VSŽ.

"It was necessary to be realistic, bearing in mind the stabilisation of the company and the entry of the strategic partner," said Peter Benčúrik, spokesman for the Minister of Economy Ľubomír Harach.

Based on the support of the memorandum, which was signed on March 24, both VSŽ and US Steel officials will harmonise the exact details of the sale and present it to VSŽ shareholders. They will then give a final verdict on the sale at another shareholders meeting scheduled for June.

US Steel and VSŽ officials welcomed the result of the meeting. John Goodish, president of USX Engineers and Consultants (a wholly-owned technical subsidiary of US Steel) who represented the Pittsburg-based steel maker at the meting said: "This is a historical event. We will build our base for expansion on central European markets in Košice."

Under the terms of the deal, US Steel will pay $60 million in cash for taking VSŽ's core steel businesses and creating NewCo., later to be called US Steel Europe. It will also pay back a $325 million company debt to creditor banks and $15 million in back taxes.

Neither US Steel nor VSŽ has released figures for cash-generation as part of the plans - something analysts believe would settle the debate as to whether or not the US firm had bought the Košice monolith cheaply or at its real-value price.

Thomas Abrams, an analyst with Credit Suisse First Boston in New York, said that the figures for cash the operation generated relative to the purchase price were vital before any conclusion could be reached on the true value of the deal.

"This number hasn't been revealed yet. However, I would say that from US Steel's point of view, it is a good strategic move and I think that it is also probably the right price to pay," Abrams said.

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