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PRIVATISATION TO BE FINANCED THROUGH BANK CREDIT, PRODUCTIVITY UPGRADES

Loss-making Canadian Exall throws lifeline to NCHZ

A TROUBLED Canadian petrochemical company is looking to bring closure to one of the most troubled privatisation sales in Slovakia's history.
The privatisation of the Novácke chemické závody (NCHZ) chemical plant in western Slovakia, a work in progress since 1993, was completed in January 2002 with the purchase of the firm by Exall Slovakia, a daughter of Exall Resources Toronto, and the Prvá garantovaná investment fund.
Then, in February 2002, NCHZ bought loss-making salt producer Solivary Prešov, committing to a Sk900 million investment over the next 16 months.

A TROUBLED Canadian petrochemical company is looking to bring closure to one of the most troubled privatisation sales in Slovakia's history.

The privatisation of the Novácke chemické závody (NCHZ) chemical plant in western Slovakia, a work in progress since 1993, was completed in January 2002 with the purchase of the firm by Exall Slovakia, a daughter of Exall Resources Toronto, and the Prvá garantovaná investment fund.

Then, in February 2002, NCHZ bought loss-making salt producer Solivary Prešov, committing to a Sk900 million investment over the next 16 months.

Exall Resources, which has posted losses for two years running and seen its share prices fall from 0.90 Canadian dollars five years ago to about 0.15 today, says it is now looking for alternatives to finance the investment.

Company director Stephen Roman said: "We feel that we can make productivity improvements at NCHZ that will give us more cash-flow to be able to invest in Solivary. We're also having discussions with banks to potentially finance it through bank lines."

Exall won the tender for NCHZ in August 2001 after striking a deal with Prvá garantovaná, then the majority owner. After making payments of Sk275 million in January 2002, Exall Slovaka was awarded a 41 per cent stake by the FNM privatisation agency.

Exall then sold a 30 per cent package to Prvá garantovaná, leaving Exall with 10 per cent and giving the investment fund nearly 90 per cent of the company.

According to Roman, "Prvá garantovaná financed the acquisition, and wanted someone who had expertise in petrochemicals to be involved, so they invited us to participate in the transaction.

"Prior to making a bid, we had an agreement with Prvá garantovaná whereby Exall would retain a 10 per cent interest with an option to increase to 50 per cent."

Prvá garantovaná's Andrej Kollár said that the structure of the deal was to allow the Canadian firm to get a proper look at NCHZ before it committed to the investment.

"The FNM [privatisation agency] declined to give the Canadian investors any guarantees, and Exall didn't want to invest in the stocks before they had completed an environmental audit. We gave them a guarantee, and we wanted the shares. The Canadians have the right to buy back these shares when they finish the audit. The option is good for one year," he said.

A big reason for divesting the shares to Prvá garantovaná, according to Exall officials, was to buy time to conduct due diligence and an environmental audit into NCHZ, which was the county's eighth biggest producer of solid waste in 1999.

"Obviously, we have to have a proper feeling for the environmental liabilities at NCHZ prior to taking on a major interest. We have suggested that the company complete an environmental study so everyone knows what the environmental liabilities are, and what needs to be done to bring the plant up to EU standards. Until we know what the environmental liabilities are, we can't commit to increasing our interest - we don't want to buy a pig in a poke," said Roman.

The NCHZ privatisation drama is nearly as old as the Slovak Republic. The first attempt to privatise the firm came under the short-lived 1994 Jozef Moravčík government, when the FNM signed a contract for the sale of 51 per cent of the company with the Czech firm Inekon.

However, after years of court battles and the mysterious disappearance of two per cent of Inekon's shares, the Czech firm backed out of the deal in 1999. Inekon director Jozef Hušek said at the time: "We don't want a scandal and we don't want a legal battle with a government [of Mikuláš Dzurinda] for which we've been waiting four years."

Upon their withdrawal, Inekon returned their stake to the FNM, which opened tender proceedings for the 40.9 per cent stake in May 2001.

The Canadian investor's financial troubles may become a headache, however. Exall, with Prvá garantovaná, last year attempted to buy into Romania's largest chemical plant, Oltchim. After winning the tender in April from the Romanian privatisation agency APAPS, Exall agreed to pay $10 million for a 53.3 per cent stake in the company and to invest an additional $150 million over the next three years. Exall was at the same time obliged to put $25 million in escrow and pay $376,448 in penalties for late payment.

Following the passage of an August payment deadline, however, the APAPS accused Exall of failing to meet financial obligations worth $35 million, and cancelled the contract.

Serban Georgescu, a business writer covering the case with the Romanian daily paper Nine O'clock, said: "The APAPS postponed the deal several times, but Exall didn't pay the money on time. That's what this is all about." Georgescu also attributed the problems to Exall's financial weakness.

The case is due to be heard in the Bucharest Court of Law on April 23.

In spite of its troubles in Romania and the clouds hanging over NCHZ's past, Exall remains optimistic about their future in Slovakia. As Roman said: "We want to get in, work with the management, get comfortable, and then we can make more investments."

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