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Ostrava looks to sue Mittal Steel

Shares sold to the steelworks were undervalued, city says

By Markéta Hulpachová
Staff Writer, The Prague Post
May 2nd, 2007 issue

COURTESY PHOTO
Mittal Steel Ostrava offered stockholders 550 Kč per share in 2004; three years later, the value is now around 3,600 Kč per share.
The city of Ostrava, north Moravia, is preparing to sue the Czech Republic’s largest steel producer, Mittal Steel Ostrava (MSO), over 114,650 shares the city sold back to the company in 2004.
If filed, the suit will be the third in a series of lawsuits brought against MSO by its former minor stockholders, who say MSO bought their shares back for less than their actual value, MSO spokeswoman Jana Dronská said.
When MSO — then known as Ispat Nová huť — decided to buy back its shares in the spring of 2004, it offered its minor stockholders 550 Kč per share. Since then, the value of MSO’s shares has increased nearly sevenfold. The current price per share stands around 3,600 Kč ($175).
 “Facts indicate that the share purchase price set in the 2004 sales agreement between the city of Ostrava and MSO was not fair,” said Petr Kajnar, the city’s chief magistrate.
The MSO says its shares were priced accurately.
“The 2004 buyback price was appraised by a respected company and approved by the Czech Securities Commission,” Dronská said. “At the time, the price corresponded with the company’s value and financial prospects.”
MSO attributes its increased value to growth in the industry and internal efficiency, due in part to its 2003 acquisition by global industry giant Mittal Steel (then LNM Holdings).
“The company’s privately owned shares are at a higher value today because of the dramatic growth of the steel market and the Mittal group’s positive influence on the direction of Ostrava steelworks,” Dronská said.
Polish parallels
Mittal Steel faces similar allegations in Poland.
The Polish Finance Ministry recently asked the country’s Supreme Chamber of Control (NIK) to investigate the 2004 privatization of Mittal Steel Poland (MSP), formerly Polskie Huti Stali.
In April, the NIK found that MSP bought its 70 percent stake in the steel mills for almost 2 billion złoty ($720 million/15 billion Kč) less than the actual value.
The Polish government is now urging Mittal Steel Poland to pay more than the formerly agreed price of 67 million złoty for the 30 percent of the company that remains in the Polish state’s possession, according to NIK.
Both MSP and MSO are under the direction of Gregor Münstermann, who formerly oversaw only the Ostrava works. Münstermann gained his additional mandate through organizational changes that resulted from Mittal Steel’s 2006 merger with Luxembourg-based steel company Arcelor.  
Before Mittal Steel acquired Nová huť (now MSO) in 2003, Dronská said the company was on the verge of bankruptcy. But, in 2004, a worldwide demand for increased steel production, spurred in part by increase automotive production in Central Europe, caused the industry to flourish.
Experts say such booms are hard to anticipate.
“The positive turn of the market situation that the steel industry is experiencing in its current phase was not predicted,” said Jaroslav Raab, chairman of the Czech and Slovak Steel Federation.
Raab says, however, the Czech steel industry also owes its affluence to the internal reconstructions it underwent as part of several development programs requested by the European Union in 2002.
“Everything that lies in the hands of the industry’s management had roots in the development programs. Owners and management were able to increase marketability and are now profiting highly from the corporations’ situation,” Raab said.
MSO generated a record income of 8.4 billion Kč in 2004 and has continued to prosper in the past two years. Steel production levels remain high even as the company undergoes significant downsizing. MSO has reduced its work force more than 2,400 people since 2004 and expects to lay off an additional 2,000 by 2008.  
Through these changes, MSO is complying with a 2001 EU-directed national program to increase the trade competency of the Czech steel industry. One of the program’s goals is to shrink the total number of Czech steel workers to 8,500. MSO alone currently employs about 8,600 people — making it one of the region’s largest companies.
Last year, MSO’s employees received an average income of 25,881 Kč. In February, the company pledged to raise this year’s average wage at least 5.1 percent.
In recent years, MSO has been involved in arbitration with the Czech Republic, which owns 13.88 percent of the steelworks. The investment group Petrcíle, which the steel company founded in 1996 as the management company for Nová huť, is suing the state for compensation or the return of state-controlled shares that Petrcíle says it was promised during privatization.
Upon resolution of the Petrcíle case, MSO will have the right to buy back the company shares that are in the state’s temporary possession, Finance Ministry spokeswoman Veronika Hovorková said.
 The state’s position on the expected legal battle between MSO and the city of Ostrava remains unclear.
“It is not possible to anticipate the outcome of the legal proceedings,” Hovorková said.  

Markéta Hulpachová can be reached at mhulpachova@praguepost.com


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