DOCUMENT   



 

DOCUMENT on THE FINALIZATION OF NEGOTIATIONS

for SC SIDEX SA Galati PRIVATIZATION

In order to implement the principles stipulated in the Council of Europe Decision of December 6th 1999 regarding Romania?s EU accession and of Protocol no. 2 on Romania?s accession to the European Economic Community, the Romanian Government ensures the establishment of a viable market economy by observing the agreements concluded with the IMF, the World Bank and the EU, and in this context pays special attention to the implementation of the privatization program within the PSAL Program.

The Government?s move to attract a strategic investor for SIDEX? s privatization is based on the special situation on the steel market, caused by the world crisis started in 1997, that imposed the “merger-mania” of the companies in the field, a crisis that was however successfully overcome by ISPAT, the holding that obtained last year spectacular increases in the turnover and the profit before taxes.

I. CURRENT SITUATION OF SIDEX- SA Galati

SIDEX cannot be considered as a mere individual economic entity but as a major provider of secondary economic life, and the decisions made took into account the macroeconomic, social and political impact.

SIDEX directly or indirectly influences the existence of as many as 150,000 people, out of whom 60% from Galati and the surrounding areas. The steel plant contributes approximately 5% to the GDP and its exports represent 2% of the world?s steel sheet market.
On June 30th 2001 the situation at the SIDEX steel plant was as follows:
· The company had losses of ROL 91,000 million resulting from its core business
· As to the entire business, the losses amounted to ROL 3,609,212 million
· The volume of outstanding payments and penalties amounting to ROL 28,392,413 million is higher by 16% as compared to December 31st 2000;
· Compared to the results of 2000, the total quarterly losses of 2001 are higher by almost 46.00%;

At the same time, regarding the arrears and the debts, the estimated values show an increase of almost 22% as compared to those of 2000, thus reaching ROL 29,879,853 million.
The estimated level of debts also has registered an increase of 14.2% compared to the previous year.

So SC SIDEX SA Galati is facing a difficult situation financially speaking, being unable to find the necessary funds for raw material and materials imports and for the payment of its creditors. The necessary working capital cannot be covered only by selling its own products given the insolvent domestic market and a foreign market characterized by low price levels.

SIDEX SA Galati still being owned by the state and the continuation of its activity in the same conditions is not an option. The company is actually insolvent and its already risky financial situation is getting worse every day. The lack of cash and the chronic lack of working capital forced the company to rely on barter-type contracts both for sales and for raw materials (with significant money losses incurred by this type of contracts) and thus they could not observe the payment deadlines towards their creditors, the banks and the state. Under these circumstances, an obvious risk is the de-capitalization of other companies with which SIDEX has contracts, which led to fabulous increases in the arrears.

So it was a must that SIDEX privatization be made by a strategic investor whose profile allowed major investments over a short period of time, allowed for the integration of the company in an international network of companies that are trusted by the major banks without necessarily requiring governmental guarantees, opened up perspectives for more clients and partners in some segments that it could not approach under the current circumstances and whose profile also attracted possible investments in fields collateral to the steel works or in sectors that have no apparent links to the steel works. A development-targeted investment, such as the one in SIDEX, entails not only contribution to the purchased company but also the development of the economic area by attracting small and medium sized investors that develop activities that had not been needed up to that moment. As a general rule, the presence of several big strategic investors and the like investments entails “secondary” developments of the respective area, which directly or indirectly derive from the development of the basic entity and which, by a reverse economic reaction, will boost the development of the main business, in time.

The experience accumulated up to now shows that delays at this moment of the privatization process would lead to the worsening of SIDEX?s current problems, to an increase in the amount of existing debts and obviously of the pressure exerted by the steel plant?s losses on the state consolidated budget. It cannot afford to support necessary investments at the required level, due to the lack of capital, which has as an immediate consequence, the maintenance of the current state of commercializing the products of low added value. It is a vicious circle that could be broken only through a large capital infusion, brought by a strong strategic investor, which will include SIDEX in an international steelmaking group.

SPECIFIC ELEMENTS OF THE TRANSACTION

Due to the fact that the validity term of the sale offer expires on July 31st 2001, agreeing with LNM HOLDINGS, the Privatization Commission appointed through Governmental Emergency Ordinance no. 34/2001, decided to sign the general frame of the Sale-Purchase agreement, without the Annexes. As a result, there will be a certain time lapse specified in the contract between the “execution date” and the “closing date”, during which certain conditions pertaining to the Government?s competence or its diligences are to be fulfilled in order to be approved by the Parliament and that are called: “Conditions Precedent”. The annexes to the Sale - Purchase Contract are also to be finished in this transition period.

In this period the institution of the Observer is also maintained between the management staff of SIDEX and the representatives of the LMN HOLDINGS, which will be informed on the activity of the company, without the right of participating in the decision making process.

Based on the final, improved and binding bid, the Privatization Commission negotiated all the clauses of the Shares Sale-Purchase contract. The results of these negotiations, as they were finalized, are provided in the contract:
· The final price established by the parts involved for the shares to be bought is USD 0,10 /share;
· The final price results by multiplying the price per share by the number of bought shares which will be determined only on Closing Date, as a consequence of the agreed conversions.
Out of the Purchase Price, the amount of USD 25,000,000 (“the down payment”) will be transferred by the Buyer into the Designated Seller Account within 3 working days from the Closing Date. The Price Difference will be paid by the Buyer at the end of a 15-month term from the Closing Date. Within this period, until the date of the Price Difference payment, the Buyer owes to the Seller an annual interest equivalent to LIBOR interest plus an interest margin of 0,5% applied to the amount of the Price Difference.

For 10 years following the Closing Date, the Buyer firmly commits to implement the Technological and Environment Protection Investment Program agreed by the parties, investing at least USD 351.1 million out of which at least USD 275 million for the Technological Investment Program and at least USD 76.1 million for the Environmental Compliance Program. Out of the Investment Commitment, the Buyer commits to make Investments of at least USD 175 million out of its own sources.

These firm investments support the business plan clauses presented by the investor, a plan which is a distinct annex of the sale-purchase contract, by which this estimates a production increase of 40% over the next 5 years. Thus:
· For a 5 year period from the Closing Date, the Buyer firmly commits (according to the Environment Protection Compliance Program) to invest at least USD 76.1 million, out of which at least USD 25 million are Investments from the Buyer?s own sources of financing, in equally divided amounts.
· For a period of 10 years from the Closing Date, the Buyer firmly commits to investing at least USD 275 million (“the Investment Plan”) from which at least USD 175 million will be invested over the first 5 years (from which at least USD 75 million will be from the Buyer?s own sources of financing), and at least USD 100 million between the 5th and 10th year (from which at least USD 75 million will be from the Buyer?s own sources of financing).
· Investments in the Investment Program will consist of new, modern equipment.

WORKING CAPITAL

The buyer firmly commits, guarantees and provides working capital for the Company, without financial expenses from the company, whose cost will be provided by the Buyer, amounting USD 100 million, out of which USD 60 million upon the Closing Date and USD 40 million within 9 months from the Down Payment Date. The Buyer also commits to make all efforts for providing or arranging supplementary working capital, if the Company requires it.

SOCIAL CLAUSES

The Buyer firmly commits:
a) To maintain the number of employees existing as of Closing Date and not make collective layoffs 5 years from the Closing Date
b) Not to reduce the number of employees within the first 5 years for other reasons than: retirements, death, disciplinary firing, resignations, transfers, agreements between the Company and its employees.
c) To negotiate wage increases strictly according to the evolution of work productivity within the Company.
d) Continue to offer reasonable incentives and benefits to the employees such as: professional training, lunch and special meals for specific groups of employees, transport and school expenses, bachelors? housing, medical programs, gifts for children, etc., as long as their total costs do not exceed USD 5 million for a year
e) To annually employ about 300 graduates, from various Romanian institutions (especially from vocational institutions in Galati - the Metallurgic Industrial School Group)
f) To facilitate within reasonable limits the continuity of the co- financing programs for building houses for the employees and sell these houses to the employees
g) To co-finance, together with other state institutions, re-conversion programs and social assistance programs in case the Company will proceed to collective layoffs following the expiration of the 5 years term.

Other essential clauses

· The closing will take place no later than October 31st 2001. In case the Closing does not take place before October 25th, due to possible failures to meet the Conditions Precedent to Closing, the Parties will meet no later than October 29th and will be able to agree, if necessary, to extend the Closing period.

· Following the closing of the agreement between the Romanian and Ukrainian, regarding the recovery of the debts of the Krivoi Rog Steel Plant towards the Romanian state, the Buyer commits to take over the entire quantity of pellets needed in the production process of the Company, according to terms that will be established in a separate agreement, which will be concluded with the Romanian state, within a reasonable timeframe. The conclusion of this agreement will be notified by the Buyer to the Seller.

· At the General Shareholders Meeting, the Buyer will not approve that the Company changes its main scope of work, as outlined in the Statute, for a period of 10 years from the date the contract is signed, except for the case when this change is either imposed by the law or agreed with the Buyer.

· The Buyer will not have the Company deliberately liquidated or dissolved, for a period of 10 years.

· For 5 years from the Closing Date, all amounts resulting from the sale of assets will be used exclusively for the investments required by the Company.

· The Buyer commits to buy all the newly issued shares as a result of the swap of budgetary debts intto equity as of Closing Date at the same price as the Price per Share for each of such newly issued share.

· For a period of 10 years following the Closing Date, the Buyer will not use the shares acquired as collateral for any other financial obligations.

Conditions precedent to Closing

In order to finalize the transaction, the Parties have defined a series of preliminary requirements before the Finalization. Among these there are:

1. A legal document operating as a Law will be issued; it will stipulate that all the debts towards the State Budget, towards banks, towards the energy providers, towards the transportation providers, as well as the debts towards AVAB (Assets Recovery Agency) will be swapped into shares; simultaneously, penalties and late payment fees will be cancelled and all institutions involved in legal actions will drop their charges in court or in front of any other arbitration authorities; they will also drop their actions regarding enforced payments;
2. The Competition Council has authorized the transaction covered in the present contract in terms that have been satisfactory for all parties, according to all the terms and conditions of the contract, according to Law 21/1996 and of Law no. 143/1999.
3. The ministries involved, APAPS, AVAB, power suppliers and transportation suppliers will drop all legal actions, litigations and enforced payment actions regarding the Company?s debts towards them.
4. There will be taken measures of rescheduling of payment terms regarding company?s debts towards various creditors or towards the local budgets.

 

Privatization Authority and State Participation Administration
July 25, 2001