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U.S. Steel heads for the exit

THE SLOVAK government says it does not like the prospect of one of the flagship American investments in Slovakia leaving – but admits that it has no way to stop U.S. Steel Corporation from selling its U.S. Steel Košice (USSK) subsidiary in eastern Slovakia. After meeting the president of USSK, David J. Rintoul, Prime Minister Robert Fico said that the government was ready to negotiate conditions for the company’s further operation in Slovakia if the investor chooses to stay, but did not specify what conditions he had in mind. Fico, speaking on November 20, added that he got the impression that the firm had decided to sell. Meanwhile, reports about the potential sale of the steel mill to an unspecified investor prompted media speculation about who the buyer might be and led to a political slanging match between the current premier and Mikuláš Dzurinda, a former prime minister.

THE SLOVAK government says it does not like the prospect of one of the flagship American investments in Slovakia leaving – but admits that it has no way to stop U.S. Steel Corporation from selling its U.S. Steel Košice (USSK) subsidiary in eastern Slovakia. After meeting the president of USSK, David J. Rintoul, Prime Minister Robert Fico said that the government was ready to negotiate conditions for the company’s further operation in Slovakia if the investor chooses to stay, but did not specify what conditions he had in mind. Fico, speaking on November 20, added that he got the impression that the firm had decided to sell. Meanwhile, reports about the potential sale of the steel mill to an unspecified investor prompted media speculation about who the buyer might be and led to a political slanging match between the current premier and Mikuláš Dzurinda, a former prime minister.

“Overall, it now shows what madness it was to privatise state property,” Fico said on November 20, before meeting Rintoul, as quoted by the SITA newswire.

While blaming the current situation on the governments of Dzurinda, which governed between 1998 and 2006, Fico suggested that the Dzurinda administration literally gave away state property adding that “western investors were making a mint and now, when they have pulled out everything they could from here, they are leaving Slovakia for good”, according to SITA.

Fico also referred to media speculation about plans by foreign shareholders in power distribution firm Stredoslovenská Energetika (SSE) and gas utility Slovenský Plynárenský Priemysel (SPP) to sell up and leave. However, Fico also conceded that other factors are at play. “It has to be said that various standards of environmental protection and requirements put in place by Brussels on steelworks are so stringent that these companies are losing their competitiveness compared to steelworks in, let’s say, Ukraine or China,” he said, as quoted by the TASR newswire.

The Slovak Democratic and Christian Union (SDKÚ) called Fico’s statements outrageous, and argued that U.S. Steel, by buying the Košice-based steel mill in 2000, had in fact saved the economy of eastern Slovakia. SDKÚ deputy chairman Ivan Štefanec said, as quoted by SITA, that Fico’s statements suggested that he would had preferred it if Východoslovenské Železiarne (VSŽ), the name of the steel mill before U.S. Steel acquired it, had remained in the hands of the Rezeš family. The Rezešes acquired the steelworks under the Mečiar governments of the 1990s and subsequently mismanaged it to the point of near-bankruptcy.

“Everything I was doing in 1998 after I became prime minister I was doing to save the steelworks, to find a solvent investor who could keep the factory afloat,” Dzurinda told TASR, referring to events that took place 14 years ago.


The speculation


Reports about the potential departure of the U.S. Steel Corporation prompted speculation in the local media over who might purchase the mill, Slovakia’s largest.

“We have not bought it,” said a spokesman for Ukrainian steel firm Metinvest, Ivan Šmidník, responding to a report in the Hospodárske Noviny business daily stating that a deal had been signed on November 18 in Vienna.

Earlier in November, USSK spokesman Ján Bača confirmed to The Slovak Spectator that “we have received expressions of interest in U.S. Steel Košice, likely due to its strong financial performance and strategic position in the region”.


History


The history of steel making in Košice dates back to the late 1950s, when the decision was made to build a new steel mill on a greenfield site as part of the country’s industrialisation under communism. After the fall of the communist regime in 1989, the government, which by then was under prime minister Vladimír Mečiar, privatised the profitable Východoslovenské Železiarne (VSŽ), as it was then known, via coupon privatisation and direct share sales. The latter took place under murky conditions, and were financially disadvantageous to the state. Alexander Rezeš, a minister in Mečiar’s 1994-98 government, and his family gradually took over the management of the company. The company’s privatisation was completed in 1995.

Under the Rezešes’ management the holding group acquired firms involved in steel production, as well as several other unrelated enterprises, for example the prominent Czech football club Sparta Praha, the Slovak daily Národná Obroda, a radio station, financial institutions and many others in Slovakia and abroad. The holding grew into a powerful group with links to the government and economy. Alexander Rezeš, for instance acted as the election leader of Mečiar’s HZDS party prior to the 1998 parliamentary election. The structure and financial flows of the holding and its scores of subsidies was complex and non-transparent. The holding became burdened by excessive debt, which the management had acquired to pay for its ever-wider acquisitions, and ran into financial problems as a result.

In November 1998, after the first Dzurinda government had taken power, VSŽ management led by Július Rezeš, the son of Alexander, admitted that the company was facing a serious financial crisis. The company was threatening to default on a $35-million loan it had taken out in 1995. It was estimated that the holding group had by then accumulated another $450 million in debts, and that many of these could be called in via so-called cross-default clauses if the $35-million debt went unpaid. It also owed a large amount in taxes to the state. Under severe pressure, the Rezeš-led management stepped down and businessman Gabriel Eichler, nominated by creditor banks with the support of the government, which controlled about one third of VSŽ, became the company’s president. He was tasked with making the firm’s financial flows transparent, restructuring and stabilising the company, restructuring its debts and preparing the company for sale to a foreign investor. It took him one and a half years to complete the reorganisation of the core business of VSŽ and prepare it for sale.

Before a crucial shareholders meeting scheduled for May 25, 2000, at which the shareholders were expected to approve the sale of VSŽ’s core business, i.e. its metallurgical production and related activities, to U.S. Steel Corporation, the firm’s shareholder structure changed significantly, with the state and other companies and institutions acting in concert to secure majority control. Eventually these shareholders approved the sale according to conditions agreed upon in a memorandum of understanding between U.S. Steel, VSŽ and the Slovak Republic signed in March 2000.

The US investor took over the VSŽ’s core business on November 24, 2000, starting a new phase in the history of the steel mill.

At the time, questions emerged over the price the government had paid for the majority stake in VSŽ, as well as the price for which the US investor obtained the core business.

In total, U.S. Steel was to pay a maximum of $495.5 million for the steel mill. This sum included $60 million in cash, the assumption of $325 million in debt (out of a total of $411 million), settlement of $15 million in overdue taxes, and payment of a share of profits not lower than $25 million but not higher that $75 million to VSŽ shareholders in 2002 and 2003. It also promised to invest at least $700 million in the company over a period of 10 years. USSK was eligible for tax relief totalling $430 million up to 2010, although this sum had been exhausted by 2008.

With press reports

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