After 20 hours of talks, VSŽ President Gabriel Eichler (right) and Prime Minister Dzurinda had what they wanted - an outline deal with US Steel.
The deal came after two long days of discussions on March 23 and 24, and over 16 months of uncertainty regarding the future of VSŽ, which essentially went bankrupt in November 1998 after defaulting on a $35 million syndicated loan from Merrill Lynch.
Although concrete details on the deal, set to be signed as soon as US Steel officially finishes its audit of VSŽ, have yet to be disclosed, both Eichler and Wilhelm announced that a new company fully owned by US Steel would take over all of VSŽ's core steel activities and some of the firm's debts. The memorandum was brokered by Slovak Prime Minister Mikuláš Dzurinda, who led discussions between the parties.
The actual contract on the merger, which has to be approved by both US Steel's Board of Directors and VSŽ shareholders, is expected to take around three months to take force.
Despite the obvious jublation of the Slovak government, which is VSŽ's major creditor, current VSŽ management may have a difficult time securing enough support among shareholders to have the memorandum approved. Powerful VSŽ owner groups close to the former management of Alexander Rezeš and his son Július, both former VSŽ presidents, have said they are not happy with the deal because many of VSŽ's subsidiaries would die without the parent company.
But market analysts said that it was unrealistic to expect US Steel to buy into all of VSŽ's daughter companies, especially those near bankruptcy. At the time of its 1998 crisis, the VSŽ group numbered over 120 firms, including press, sports and finance interests. VSŽ spokesman Jozef Marko agreed, adding that shareholders surrounding Rezeš could be bought off if a suitable price was offered for their shares. "VSŽ is considering paying the shareholders some money for the transfer of assets to the new company fully owned by US Steel which would allow them to support the efforts of VSŽ management," said Marko.
All three engaged parties - US Steel, VSŽ and the Slovak government - declared themselves pleased with the outcome of the latest talks. According to US Steel spokesman Thomas Ferrall, VSŽ would be the American steel maker's first acquisition in Europe and a "very important strategic step."
According to Eichler, the new investor will continue stabilising the company after the chaos that saw VSŽ with a debt of more than 11.6 billion Slovak crowns ($276 million) at the end of 1998. Since May 1999, the steel maker has considerably increased its output, and now produces 250,000 tonnes of rolled steel a month on average compared to 150,000 tonnes the previous year. This increase in production, he said, has gone hand in hand with an increase in revenues, although not enough of a rise to produce a 1999 profit.
Eichler was also optimistic that the agreement would send a positive signal to other foreign investors and attract further foreign investment to FDI-starved Slovakia. "The strong partner will at the same time attract other investors and get them to the region as well as support the existence of all companies that will be part of VSŽ," Eichler said.
For the state, the most important aspect of the deal (besides recovering its receivables) was US Steel's promise to maintain stable employment levels among VSŽ's 17,000 wokers and the prospect of future business developments in the region branching off of US Steel's activities. Prime Minister Dzurinda has been talking about these aspects since the government opened discussions with US Steel in the summer of 1999.
Despite the fact that no figures concerning the future contract were available, analysts said they were pleased by the deal. "They (US Steel and VSŽ) wanted to make a decision after all," said Martin Barto, head of strategy at the state bank SLSP and a memeber of the VSŽ supervisory board.
According to Michal Kustra, an equity analyst at Tatra Banka, the presence of a strong investor in the region was a good signal for other significant foreign companies to come to Slovakia. "These big movers and shakers know each other very well," he said. "Once one comes, a chain reaction begins and others follow him in the future."
However, the mystery for Kustra and other analysts was which companies now belonging to VSŽ would be transferred to the new company fully owned by US Steel.
According to Barto, the healthiest companies in the conglomerate were some of VSŽ's daughter companies, particularly VSŽ Oceĺ which was established on January 1 as the result of a merger of two successful companies, VSŽ Export-Import and VSŽ Ferroenergy.
"If VSŽ Oceĺ, where most of VSŽ's assets are, is sold to US Steel and a shell in the form of receivables and unhealthy parts which are heading toward bankruptcy are left for current shareholders, it will be a tough job for the current management to persuade shareholders, mainly those around the former management of the Rezeš family, to support the sale," said a senior government source who spoke on the condition of anonymity.
Confirming the source's theory, former VSŽ President Július Rezeš, in an article published in the daily Sme, declared his dissatisfaction with the results of the decision to sell core VSŽ businesses to US Steel. "Those VSŽ managers led by current president Eichler who discussed the sale with US Steel had no right to discuss it because they don't have any shares in the company," Rezeš said. If US Steel really wanted to help VSŽ, Rezeš continued, they would take over both core and non-core businesses.
VSŽ management needs to secure the support of two-thirds of VSŽ shareholders to put the agreement established in the memorandum into practice. Analysts estimate that the Rezeš group holds slightly more shares than the government, by a margin of about 30% to 28%.
However, US Steel's Ferrall brushed aside such concerns. The decision made on March 24 was "good, fair, comprehensive and realistic for current VSŽ shareholders," Ferrall said. "We know that when the current management meets all the shareholders and explains to them the details of the memorandum and future contract, they will support it."