VSŽ President Gabriel Eichler was given a six-month contract in December to straighten out the steelmaker's problems with creditors. Analysts now say that VSŽ may be close to a deal to sell a stake to US Steel.
While the firm would not comment on the management shuffle beyond confirming the names involved, analysts see the moves as a definite indication that US Steel is preparing for a capital entry into VSŽ.
Martin Kabát, a securities analyst with Slávia Capital brokers in Bratislava, said he felt that US Steel "may be very close to concluding an agreement" to enter VSŽ, explaining that the American firm would probably prefer to make a deal before current VSŽ President Gabriel Eichler's six-month contract expires in June 1999.
VSŽ has said it is seeking a cash injection from a foreign partner, but has kept very quiet about the actual progress of talks. Economy Minister Ľudovít Černák said last week that four foreign firms had showed serious interest in VSŽ, but only two names, US Steel and the Indian ISPAT International, have been officially released.
Černák also said one of the four has been granted exclusivity to specify what it would do with VSŽ, but the minister and the company remain silent about who the investor is.
VSŽ's fate is crucial for the Slovak economy as a whole. The company is Slovakia's second largest employer, one of the top exporters and once produced some 10% of Slovakia's gross domestic product. Although it has taken steps to deal with its acute cash shortage, the company acknowledges it can not get back on its feet without outside help.
Where the trouble began
VSŽ's problems first surfaced in October last year when the company was unable to meet a scheduled payment of $35 million on a foreign loan. According to analysts, the business of steel making is highly cyclical - dependent on the boom-bust cycle in countries that import VSŽ's products. It is also very sensitive to exchange rate developments, because steel competes primarily on price.
The group close to former Prime Minister Vladimír Mečiar which privatised the firm in 1995 apparently lacked the foresight to use the profits from the firm's good years as a hedge against the bad years, going instead on an acquisition spree that brought interests from sports clubs - like the top Czech soccer team Sparta Praha - to banks and media under VSŽ's wing.
Late last year, however, after a new Slovak government was voted in and VSŽ defaulted on its loan payment, new management was brought in to deal with the difficulties and whip the company back into shape to attract foreign strategic partners. The new management's quick fix strategy involved selling some of VSZ's assets not related to the core business and collecting overdue receivables.
VSŽ posted a massive five billion crown ($120 million) loss for 1998 and said it owed foreign and local banks some $550 million. Creditor banks loaned the company a further $50 million after reaching a stand-still agreement in March, putting VSŽ on track to consolidation, according to President Gabriel Eichler.
US Steel on a roll
USX Corporation's US Steel, a giant with 1998 sales of $6.3 billion, has shown serious interest in VSŽ. The two companies have operated VSŽ US Steel, a joint venture producing tin-plated steel for the food industry, since 1996. Since VSŽ's financial trouble broke out last October, US Steel has been very visible around Košice.
In December last year, VSŽ underwent major changes in its board of directors and supervisory board, bringing in among others Thomas Graham, a former president of US Steel, acclaimed for his success in turning around AK Steel in Ohio. A few months later, Graham was replaced by a former manager at USX Corp's engineering branch, John Goodish.
Earlier in April, the Pittsburgh Post-Gazette reported that US Steel was considering a capital entry into VSŽ and saw it as one of the more interesting investment opportunities abroad.
In an interview for VSŽ newsletter Ocel Východu (Steel of the East), Eichler said US Steel had shown it was seriously interested in VSŽ by incurring great costs in sending teams of experts and ordering audits to look at the company. "I am convinced that US Steel would make a great investor," Eichler was reported as saying.