Ukraine leader serious on privatization revision - Krivorozhstal Will Be Sold Again

Ukraine’s authorities have confirmed plans to review the results of privatization. Last week, a Kiev court began considering a case over the privatization of the country’s largest metal works, the Krivorozhstal steel company, Vremya Novostei has reported. Yesterday, the court imposed a freeze on a 93.02 stake in the company.

The freeze is designed to prevent the current owners of the company – Donetsk-based oligarch Renat Akhmetov, and Viktor Pinchuk, a deputy of Ukraine’s lower parliament chamber and son-in-law of ex-President Leonid Kuchma, - from selling the stock to affiliated companies. According to the newspaper, the court hearing is scheduled for February 18.

Even prior to his election as Ukrainian President, whilst leader of the Our Ukraine party, Viktor Yushchenko insisted on a moratorium on the privatization of the country’s largest companies “until Ukraine’s political authorities are changed.” However, at that point, he did not have the necessary administrative methods at his disposal to impose the moratorium. As a presidential candidate, Yushchenko again announced his intention to review “such obvious theft of state property as the privatization of Krivorozhstal, carried out by the country’s previous administration headed by Leonid Kuchma.” On winning the election, Yushchenko began to put his threats into action.

Krivorozhstal was privatized in the summer of 2004. A 93.02 percent stake was purchased by Investment and Metal Union, in which Akhmetov’s System Capital Management has a 56.25 percent stake, and Pinchuk’s Interpipe owns another 43.75 percent.

While Investment and Metal Union offered only $800 million for the stake, rival bids, including offers from Russian companies, exceeded $1 billion, Vremya Novostei reported.

When it became obvious that Yushchenko had won the election, Pinchuk issued a statement saying that if reports were confirmed that any Russian company had been ready to pay 5 billion hryvnas (about $1 billion) more than Investment and Metal Union paid for Krivorozhstal at the privatization auction, he would pay the difference to Ukraine’s state budget.

Meanwhile, Alexander Pilipenko, deputy chairman of Investment and Metal Union, estimates the controlling stake in the steel company’s price at more than $2.5 billion.

Krivorozhstal Will Be Sold Again - Jan. 28, 2005

Yesterday, the Pechersky District Court of Kiev authorized the State Property Fund (FGI) of Ukraine to reconsider the results of the privatization of the Krivorozhstal steel works. This means that the company's current owner, Viktor Pinchuk, a relative of Leonid Kuchma, will be dispossessed. As Ukrainian President Viktor Yushchenko told Kommersant, the company will be put up for resale. Investors, including Russian companies previously shut out of the privatization auction, have confirmed their interest in the company and are planning to repeat the attempt to acquire Krivorozhstal.

The FGI made the decision to privatize Ukraine's largest steel works in August 2003. A total of 93.02 percent of the shares in OAO Krivorozhstal were put up at an auction held on June 14, 2004. The remaining shares (6.98 percent) were to have been dispersed by privileged subscription: 5 percent among management, and 1.1 percent among the workers. The starting price of the package was $718 million.

Russian metallurgical holdings showing an interest in the company included Severstal Group (owned by Aleksey Mordashov), which appeared at the auction along with the Swiss company Arcelor and the Evrazholding Group (owned by Aleksandr Abramov). Severstal was prepared to offer $1.2 billion for the company, but not a single foreign participant was admitted to the auction, including the alliance of LNM Group and US Steel and the Indian TATA Steel. We remind our readers that the reason for rejection was an additional condition announced by the FGI in May 2004. Under it, only companies that had been producing coke on Ukrainian territory for at least three years – with a profit – could participate in the privatization.

Nonresidents of Ukraine who found themselves automatically excluded from the auction declared that the conditions of sale were unfair. Nevertheless, the company was sold in June for $804 million to the Ukrainian Metallurgical Investment Association (IMS). Competitors' applications were rejected, although their offers were at least $400 million more than the winner's application. We recall that 56.25 percent of the shares in IMS are owned by System Capital Management of Donetsk belonging to businessman Rinat Akhmetov; and 43.75 percent, by Interpile Corporation of Dnepropetrovsk belonging to Viktor Pinchuk, the son-in-law of ex-president of Ukraine Leonid Kuchma.

We note that during his election campaign, Viktor Yushchenko said repeatedly that he would challenge the privatization of the steel works. He noted that the auction was nontransparent, and the amount paid for it was too little. Therefore, immediately after Mr. Yushchenko's inauguration, the Perchersky Court of Kiev began considering two claims filed by deputies of the Ukrainian parliament, who insisted that the auction sale and privatization of the steel company were illegal.

The claims were filed even before the sale of Krivorozhstal, one in the Shevchenkovsky Court of Kiev demanding the annulment of the privatization, share registration, and the FGI orders approving the share placement plan and the additional conditions of the auction. In addition, the plaintiffs demanded that the placement of Krivorozhstal shares in the accounts of the Ukrainian branch of ING Bank be declared illegal and that the bank be prohibited from carrying out operations with these shares. But at that time, the court dismissed the deputies' claims.

The substance of the complaint was changed in January. The plaintiffs demanded that the steel mill's current owner be prohibited from alienating shares in Krivorozhstal in order to be able to contest IMS's purchase of the company in the near future.

Yesterday evening, the court ruled that the FGI had the right to annul the results of the auction, that the State Securities and Exchange Commission had the right to retract its decision to register the Krivorozhstal share issue, and that ING Bank had the right to withdraw the company's shares from IMS's account.

Viktor Yushchenko told Kommersant of his plan to resell Krivorozhstal. First, a special commission would study the legality of the auction and estimate the company's value, and then the materials would be sent to the court to appeal the sale of Krivorozhstal and schedule a new tender. To all appearances, this plan may be fulfilled in the near future.

According to Kommersant's information, the starting price for the company at the new auction may be raised to $1 billion, and the closing value could reach $2 billion. Severstal representatives declined to comment on the situation, but sources at Evrazholding are not excluding the possibility of participating in the tender. Nicola Davidson, the head of the public relations department at Mittal Steel (formerly LNM Steel) told Kommersant: “If the news (of the reprivatization – Kommersant) is confirmed, we will consider the possibility of participating in the auction”. Carly Vargo, a spokesman for US Steel, also noted yesterday that the company “is still interested in acquiring Krivorozhstal”.

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