Gabriel Eichler, the president of the steel making giant VSŽ, has steered the troubled firm into the arms of a strategic investor - US Steel.
photo: Vladimír Hák
Just weeks before a crucial general assembly meeting at which VSŽ management needs to gain 50% support from the company's shareholders in order to give a recent deal with US Steel the go-ahead, Eichler and John Goodish, president of USX Engineers and Consultants, a wholly-owned technical subsidiary of US Steel, spoke about support for the deal and the future of the steel giant under new ownership.
The Slovak Spectator (TSS): What hopes do you have for this new company [NewCo - a company to be wholly-owned by US Steel and consisting of VSŽ's current core activity companies - Ed. note] that will be owned by US Steel?
John Goodish (JG): We have the ability to significantly enlarge this company and take advantage of the marketplace in central Europe. Our objective is to become a premier supplier in the marketplace.
TSS: Why did you decide to invest in Slovakia? After all, this is your first European investment.
JG: US Steel was a major investor in Europe in the sixties and early seventies, but we suffered a severe crisis in our own company in the early seventies and had to downsize - we sold all our foreign operations. The joint venture here [formed in 1998 between US Steel and VSŽ for the production of hot-rolled steel - Ed. note] was the first major move in the better part of 25 years. The joint venture itself has been successful and we are impressed with the talent of the people, the technical skills, the work ethic and what we have been able to accomplish in the joint venture. We see VSŽ as basically a good facility that, yes, needs significant investment to get it into the value-added marketplace, but essentially the basic structure is there to work from. A lot of the other [steel] mills in central Europe need a significant amount of investment to get into the position that this mill [VSŽ] is in today.
John Goodish, one of the brokers of the deal, says that jobs at VSŽ will not be threatened.
photo: Milan Krupčík
JG: Our objective would be to move into value-added products. When we talk about value-added products, we're talking about exposed automotive parts, significantly enhancing the white goods market [eg. in household appliances], but 50% of what VSŽ produces now is hot-rolled product and we plan to boost production and make significantly more tons [of steel]. But even as a hot-rolled [steel] producer it produces what is referred to as commodity grades of steel. We would bring our practices over, which would significantly enhance that hot-roll mix to get into the value-added hot-roll and more specialty hot-roll products.
TSS: Do you expect revenue increases as a result of your entrance into VSŽ?
JG: There is a lot of work that is going to have to be done. Prices will be affected by the marketplace and what is going on there. But we need a significant amount of systems work to be done in order for us to have better control over what is going on with our own sales organisation. Look at an organisation chart of VSŽ - they have sales officers and then they have joint-venture sales officers, and controlling those officers has in the past been very difficult. VSŽ has better control over them than they had over a year ago, but not yet to the point where you could control all of that activity from Košice with little computers. It is going to take some time to get that done.
The other way to increase sales revenues is by providing more service to customers. People talk about the quality of products that are being produced today, and not only are they talking about the physical steel that's being produced, but the service that goes with that - when am I going to get my steel? is the paperwork all correct? - we need to spend some time working on those aspects as well.
As the market in central Europe becomes more mature, with the manufacturers they're going to ask for decent time delivery as well. It takes time to get those practices in place. This is one of the reasons we're committed to stable employment. We want the people in the mill to concentrate on coming up with new practices or implementing our practices, improving customer service and the quality of the product. We don't want them to be concerned with whether or not they have a job next week, next month or next year. We want them to know that they do have one.
TSS: How successful were you with the due diligence results?
JG: We're doing two things right now. There are due diligence activities going on and we also have a group of lawyers and accountants working on putting the documents together to get the deal [between US Steel and VSŽ] closed. There are always bumps in the road and we believe that it went well. It took longer than we expected because of having to get to the bottom of 131 companies and how they are intertwined, but we got through that satisfactorily and we're progressing very well.
TSS: Are you worried about opposition to the US Steel plan from a group of VSŽ shareholders called the Rezeš group?
JG: Not really, because when all the shareholders realise what the true value of the deal is compared with what the alternatives are, they'll recognise that they are getting a sure deal.
TSS: What is the true value of the deal?
JG: Somewhere between $425 and $475 million.
TSS: How much did you pay for VSŽ?
JG: It will be between $425 and $475 million.
TSS: How would you comment on original press speculation that it was $60 million?
JG: Well, the $60 million forgets the fact that there is $325 million of debt to pick up, $15 million of taxes to absorb and then the equity pay out. As far as the leak to the press goes, it's unfortunate that that happened, but we have to recognise that we are operating in Slovakia and people are somewhat suspicious because of things that have taken place in the past. We're trying to be a good businessman in this country and to do things from a transparent perspective.
TSS: Apart from the leak, is that figure close to the real money that VSŽ will get from the deal?
TSS: A lot of minority shareholders believe that through this deal, in taking core activities from VSŽ to the new company, VSŽ is ignoring their shareholder rights. Is this true?
JG: Once all the details are worked out the current shareholders are going to own OldCo - the companies that we are not taking, a significant number of which will have long-term contracts with the steel company. We believe OldCo will be a viable company, and Mr. Eichler spoke about this significantly in that the companies essentially will not have any debt depending on the resolution of tax issues with the government. The shareholders will have this viable company in addition to what the ultimate pay-out is from US Steel.
TSS: What co-operation are you planning with OldCo - the companies that basically are non-core activities?
JG: I think that VSŽ's co-operation with it will have to assure the viability of this company. It will be down to the management of that company to make sure that they run that company in a business-like manner.
TSS: Mr. Eichler, a few days before the May 25 general assembly meeting, how much support have you gained from current shareholders for US Steel to enter into VSŽ?
Gabriel Eichler (GE): We have talked to all the major shareholder groups and none of them have been opposed to US Steel or us taking a strategic investor. There are issues over getting the memorandum of understanding [between VSŽ and US Steel] explained and what was going on with it. They also feel that they would like to get more, of course, and that I understand. Many of them have not committed to voting one way. I know that many of the employees who are small shareholders are supporting the deal. But every shareholders meeting we've had in the past, we didn't know even that morning how it would turn out.
TSS: What have you gained from the discussions that you must have had with the Rezeš group? You must have had some reaction. Will they support the deal?
GE: Nobody has said yes or no as to what they are going to do. I have a general feeling that people, as they get more information and understand the details of this information, that they will either support it or want to sell their shares.
TSS: With the way this deal is managed, moving all the core activities to NewCo, is VSŽ ignoring the rights of minority shareholders?
GE: No, absolutely not. First of all, all the shareholders are equal. There is no majority shareholder in this company. There are various shareholder groups, and none of them form a majority. Some of them are a larger group, some of them a smaller group, but nobody runs the company through these groups. All the shareholders get the same value. The choice the shareholders have is for the company. Let's assume that it were to stay without a strategic investor - it is a viable company, but what it requires is to catch up with huge investments that it did not make in the last several years in the steel business, money which it invested instead in other companies.
TSS: Is VSŽ rich enough to make this investment?
GE: It can, and our plans show that it can create enough cash flow to invest, but that investment will be much slower than if a strategic investor comes in. You could do it over a period of 10 years, but these investments have to be made now, and for that we would have to borrow and increase the debt we already have now, and I do not think that I would find too many people to lend new money when this issue of old debt is not solved, and that is all payable today. So I would need to get the bank support for that, and there would have to be a different kind of restructuring, there would remain a large debt on the company and the repayment of that debt would most likely take all of our cashflow generated by the company and would leave nothing to the shareholders in terms of dividends for many years to come. So for the shareholders, small or big, they have a choice: have a company like that that will have to invest and pay back the banks and see no dividends for many years to come, or not invest and pay the banks and remain a mediocre company liable to cycles in the steel industry and be vulnerable to competition from the east where the labour is cheaper and pretty soon will have the same quality and products that we have and may not survive the competition.
So the choice is clear: remain a part owner of the company and keep it, but not see any money for a long time, or get some cash sooner, but you will no longer own assets of the company.
TSS: If you were a banker, would you provide the non-core VSŽ companies with a loan?
GE: Well, some of them are in reasonable shape. But for the remainder, in terms of revenues, steel is 90% of the company [VSŽ]. In terms of profit the amount is much more than that. Then less than 10% of the revenues of the daughter company come from non-core companies. Of the non-core companies, about half are somehow related to the steel industry. These companies will have longer-term contracts with US Steel, so they will have a reasonable chance to not just survive but to prosper.
So what will be left is a few companies, employing about 2000 people, in difficulties, the way they have been for some years. Those companies are formally owned by VSŽ, but in reality are owned economically by the government. They are over-debted. What I have to do is somehow clear the debt, and the banks can help restructure those companies, leaving some of them viable, some not.
It is down to the banks. If one can deal with the banks in this situation to solve this problem then that's fine, otherwise no-one can help.
TSS: Is there a possibility that the banks could even bring these companies into bankruptcy?
GE: Yes, there is. In the case of VSŽ we convinced them not to, but with these companies it may not be so easy.
TSS: So you haven't considered compensation for shareholders for taking core activities to NewCo and leaving them with non-core activity companies?
GE: The compensation is coming from the money from US Steel. They will have a viable company that has no debt. The bank should be paid out through the transaction with US Steel, as should the government and suppliers. So this is a company without any debt which has some assets, some doubtful and some good, which will have some cash left and the shareholders will further get this payout from US Steel.
TSS: What co-operation do you plan with these companies?
GE: The ones that are related to steel will get a long-term contract with US Steel.
TSS: How much support from shareholders do you need to get this deal through?
GE: We are doing it in stages just to make it clean. The first one is going to be in relation to the MoU and its approval so we can go and finalise the transaction. Once that is clear then the second vote will be to approve the final transaction. This is as clean as possible in this way. What more can anyone ask in terms of the transparency of this transaction?
TSS: So the May 25 shareholders meeting will not give a definite answer on this?
GE: Well, if the majority opposes it then we have to see what the problem is, but if they approve it then we can basically say go ahead and do it. If we then deliver the final, precise transaction that the shareholders told us to deliver, it would be very irrational for the shareholders to turn round and say no, we don't like this.
TSS: How do you feel in regard to getting this majority?
GE: I think that when the shareholders look at this deal, they will say that unless we have any real alternatives, maybe this is not as good as we would have liked, but this is as good as we'll get.