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VSŽ, TŽ and HK talk steel deals

Three major steelworks from Slovakia, the Czech Republic and Poland with combined 1995 revenues of $4.2 billionlast year are negotiating details of a cooperation agreement and ownership swaps that would band them together in the increasingly competitive European steel market.
Privatized companies VSŽ in Košice and Třinecké Železárny (TŽ) in the Czech Republic are already selling shares to each other to tighten their trading ties and both have also started negotiating with the state-owned Polish steelworks Huta Katowice (HK). VSŽ and HK are two of the largest steelworks in eastern Europe, according to a 1995 study of the region's largest companies compiled by the accounting and consultancy firm Deloitte & Touche.

Three major steelworks from Slovakia, the Czech Republic and Poland with combined 1995 revenues of $4.2 billionlast year are negotiating details of a cooperation agreement and ownership swaps that would band them together in the increasingly competitive European steel market.

Privatized companies VSŽ in Košice and Třinecké Železárny (TŽ) in the Czech Republic are already selling shares to each other to tighten their trading ties and both have also started negotiating with the state-owned Polish steelworks Huta Katowice (HK). VSŽ and HK are two of the largest steelworks in eastern Europe, according to a 1995 study of the region's largest companies compiled by the accounting and consultancy firm Deloitte & Touche.

"The central European steel mills basically can't act differently if they want to compete with the steelmills in the West," said Svätopluk Kufa, the head of the Czech Steel Federation and a manager of the private investment concern Moravia Steel. "So I understand this partnership as a rational approach to the volumes and types of our products."

VSŽ has aggressively been trying to invest in the Czech Republic for some time, for obvious business reasons. The Czechs are VSŽ's biggest buyer of its products, mostly flat steel, representing about 20 percent of the company's total sales. But it is also diversifying in the Czech market, the most notable example being the ironwork's purchase of the popular, yet struggling Sparta Praha soccer club in May for about 900 million Kč.

Only a month later, rumors swirled about VSZ's interest in TŽ, its long-time trading partner. Officials at the Czech National Property Fund, which sold 51 percent of TŽ to a group of private investors in Moravia Steel in October 1995, worried that Slovaks, as foreigners, were getting involved in Czech steel production.

But that didn't stop a deal from being consecrated. In mid-September, managers from VSŽ and TŽ announced that they had signed a cooperation agreement which later developed into cross-share ownership, with VSŽ picking up 20 percent of TŽ and TŽ 10 percent of VSŽ. The two firms will also share sales offices all over Europe.

Voracious appetite

VSŽ is eyeing a lot more than just TŽ. Once the Czech government announced in September that two other steelmills, Nová Huť and Vítkovice, would be privatized in the first half of 1997 through a combination of MBOs and on the capital market, VSŽ saw its opportunity to strike.

The Czech government, though, was skittish about allowing one investor buy out significant stakes in the two mills after the VSŽ-TZ accord Part of their relucatnace stemmed from their experience with another domesitc steel mill, Poldi Kladno. In that case, the state legally intervened to drive out the new owner of the Poldi Kladno steel mill. "The stakes [in Nová Huť and Vítkovice] will be sold in such a way as to prevent one shareholder from getting control," said a member of the Czech FNM's executive committee, Pavel Sanda.

VSŽ officials are taking the Czechs' stonewalling personally. "Some groups create problems for us regarding our attempts to acquire stakes in Czech companies," complained the chairman of VSZ's Board of Directors Ján Smerek. "It's only a question of time before Slovak capital will stop being regarded as the enemy in the Czech Republic."

Not to be deterred, VSŽ looked elsewhere to purchase other Czech steel mills, using one of the complex web of companies in which it holds a controlling share to make the buy. The investment group Omnia Invest, of which VSŽ holds 33.5 percent interest, won a public tender in August for a foundry in Moravia, Slezska Komercni Slevarna Krnov, with a book value of 85 million Kc. "[The FNM] is fully satisfied with [Omnia Invest]," said one Czech FNM official who was in charge of the tender but declined to have his name published. "They already paid us, and it acted quite fine."

Asked whether the FNM knew that the Czech firm which in listed on the purchase books could be fronting for both Omnia Invest and VSŽ, the FNM official said, "We don't really examine things like that. It's a [Czech] firm, and they pay taxes here. Even if VSŽ did own the company, we don't care."

Troika formation

Apart from its unilateral maneuvering, VSŽ and TZ drew up expansion plans which also include Huta Katowice, according to Julius Rezes, a vice president at VSŽ. While Huta Katowice (HK) is still state-owned, it's likely there won't be any capital involvement, said Ladislav Jakobec, head of VSŽ's press department.

The three companies already are working on an investment project to build a new terminal to import iron ore in the Polish port of Gdansk. However, while TZ and HK are working closely, VSŽ is expected only to participate in the "technical cooperation," said HK's press spokeswoman Renata Bytomska.

VSŽ is interested in linking all three companies to acquire iron ore from the Ukraine at discount. "We would like to introduce a common approach to purchasing raw materials from Ukraine's Krivoj Rog area," said VSZ's Jakobec.

Mixed feelings

The most advanced deal so far is the one between VSŽ and TZ, though. And it may be getting bigger, as the Slovak press reported that 40 percent of TZ's shares were sold October 10 on the Prague Stock Exchange for 2.03 billion Kc to an unknown entity. Czech traders speculate whether VSŽ bought them to buttress its 20 percent stake. Jakobec would not confirm that VSŽ indeed had bought the shares, only saying that the agreed-upon share transfer would be completed in a month.

There is no denying, though, that VSŽ is enjoying a banner year so far. The ironworks' pre-tax profits in the first eight months of this year reached 2.5 billion Sk, 537 million Sk more than projected, while total revenues climbed to 59 billion Sk, 1.4 billion Sk more than anticipated.

Steel experts in the Czech Republic have mixed feelings about the VSŽ-TZ cooperation. "VSŽ's capital would be a great help to TZ, because TZ really needs it," said Jan Kahovec, director of the steel industry consulting firm Metalconsult. But Kahovec added later that VSŽ's strong presence with flat steel in the Czech market may jeopardize the position of Nova Hut and efforts already underway to revitalize the company with financing by the World Bank's International Finance Corporation. "It may become quite competitive for Nova Hut," Kahovec said.

Others, such as Ivo Zadny from Roland, Berger & Partner GmbH said it's dangerous to look at the VSŽ-TZ partnership through patriotic lenses. "Their products complement each other," Zadny said, "and it's good for both of them."

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