Sale of Kremikovtzi Delayed

Economic News

22 Jul 2010
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What looked like a soon-to-be-signed deal for the sale of Bulgaria's biggest steel maker, Kremikovtzi, has become a drawn out affair. The factory's majority owner, Global Steel Holdings (GSHL), announced on February 1 that it would postpone the deal and consult with a financial adviser on the best course of action to take. The government, mill workers, several bidders and bond holders are now being expected to wait up to two months for the fortunes of the troubled mill to be determined.

The news comes as a surprising turn of events, after Pramod Mittal, chairman of Ispat, had confirmed he was preparing to sell GSHL's 71% stake in the steel mill to Ukrainian billionaire Konstantyn Zhevago, at the end of January. GSHL is the holding company for India-based Ispat Industries and is owned by Pramod and Vinod Mittal, younger brothers and competitors of steel magnate Lakshmi Mittal.

Zhevago went to Sofia on January 30 to negotiate the purchase of the mill and met with Bulgarian Prime Minister Sergey Stanishev to discuss the deal. Local media reported Zhevago as saying he had secured 80m euros in working capital to help the struggling steel unit. However, two days later, Pramod Mittal told local media the deal would not go through. "We had talks, but nothing was decided," he said.

The US ambassador to Bulgaria, John Beyrle, informed the prime minister on January 29 that the US Steel Company is interested in buying the mill.

A representative of GSHL said on February 5 the company had picked US bank Merrill Lynch to advise it of its options regarding the loss-making steel mill.

Other bidders who reportedly expressed interest were Mittal's brother Lakshmi Mittal and Rinat Akhmetov, considered by many to be Ukraine's richest man.

The Kremikovtzi steel mill started operations in 1963. It currently accounts for 10% of Bulgaria's steel exports, producing 1.4m tonnes annually. In 1999, a 71% stake in the company was sold to Bulgarian Finmetals group for a symbolic $1, due to its outstanding debt of $420m to suppliers and the state. An additional 25.1% stake stayed with the Bulgarian government while private investors bought up the remaining shares. Global Steel Holdings acquired Finmetals in August 2005, taking control of the mill.

Pressure on the Indian conglomerate to sell its stake in the company came to a head in mid 2007 when the company put forward, but failed to implement, a turnaround plan intended to upgrade the mill to EU environmental standards.

The mill employs 6000 people, many of whom staged daily protests during the last week of January, demanding overdue salaries be paid and that money be invested in the mill so it can remain in operation.

Mittal then pledged 20m euros to resolve the current cash-flow problems. Although most of the belated wages are said to have since been paid, trade unions staged fresh protests on February 5. The workers demanded the government take a stronger stance in solving Kremikovtzi's current difficulties and securing the future survival of the unit. Economy and Energy Minister Petar Dimitrov proposed to the governing board of the plant that a special mediator be appointed to facilitate negotiations between all parties. The unions have scheduled talks to discuss a 25% increase in salaries for employees.

Others are aiming for the complete closure of the mill. Boiko Borissov, mayor of Sofia, has long campaigned to end production at the factory and develop the area on the outskirts of Sofia, where the mill is located. In 2007, Borissov sent a letter to the European Commission to complain about what he called "repeated breaches of environmental pollution regulations by Kremikovtzi", according to local media reports. Nonetheless, factory trade unions are intent on meeting Borissov to try to get the city's commitment to help with Kremikovtzi's future development and modernisation.

Environmental issues have been raised by the plant's management board, which claimed that Kremikovtzi's survival was dependent on heavy investment to upgrade one of Bulgaria's biggest polluters, based on EU environmental standards.

The Bulgarian managers of the mill reportedly resigned on February 1, including Alexander Tomov, former chief executive director of Kremikovtzi. Tomov had told media the unit needs investments of 120m to 140m euros to remain operational.

Despite the array of stakeholders paying attention to the fortunes of ailing Kremikovtzi, Dimitrov said the future of the unit is dependent on bond holders as the mill is collateral for $481m of bonds sold by GSHL in 2006 to pay off debts to the government, fund capital spending and supply working capital. The seven-year bonds with an annual coupon of 12% have to be redeemed if there is any change in the control of the mill, said Suman Das Sharma, a spokesman for GSHL. The bond holders include Deutsche Bank and US-based QVT Fund LP.

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