Pauliu Kuncinas in Sofia -

The drawn-out acquisition battle for Bulgaria's largest steel mill Kremikovtzi has recently entered a new and quite possibly final stage. The future of the plant that accounts for nearly 10% of the country's exports is currently in the hands of a local court in Sofia, which began bankruptcy proceedings on June 16.

Despite high commodity prices and favourable access to the EU markets, the debt-laden enterprise was unable to solve its long-term debt situation that has plagued the company ever since its privatization in 1999.

The new owner since 2005, Global Steel Holding run by Pramod Mittal, has proved to be incapable of resolving the perennial cash squeeze. It is estimated that the company has around BGN1bn (€500m) of debt on its books, most of which is in the form of bonds and unpaid bills to state-owned electricity and transport companies. The plant, which has a total capacity of 2.2m tonnes per annum, has been making losses as production dropped to just 40,000 tonnes per month - almost five times below its peak monthly output.

It is, therefore, no surprise that the troubled company has become an acquisition target for established steel companies that have access to their own iron ore deposits.

Brotherly love

Arcelor-Mittal and Vorskla steel, owned by Ukrainian tycoon Kostyantyn Zhevaho, are considered to be the most likely buyers. Neither company have shown interest in acquiring the steel mill until the bankruptcy proceedings are over, citing high levels of debt as the main deterrent.

Arcelor-Mittal which is controlled by Pramod Mittal's older brother Lakshmir Mittal has already provided €30m of emergency funding to keep the company afloat and is considered by Sofia-based analysts as the favourite to win the race.

However, Zhevaho's Vorskla Steel, which has access to the world's fourth-largest iron ore deposits in Ukraine, has recently intensified its campaign to persuade the Bulgarian public and the politicians that they are a better match for Kremikovtzi.

The Ukrainian buyer is allegedly favoured by the Bulgarian politicians and also the trade-unions, which fear Arcelor-Mittal's reputation for slashing jobs.

To contrast its approach, Vorskla Steel has recently launched the so-called Revival Plan that promises to save all 6,000 jobs at the plant, while raising the plant's Ebitda margin to 13.5% by bringing lower cost iron ore from Ukraine, improving the plant's efficiency and selling its output directly to clients rather than through distributors. Vorskla Steel also owns 550 wagons and plans to invest between $500m-650m in technological upgrades.

Viktor Demenyuk, executive manager of Vorksla Steel Bulgaria, told bne that, "Arcelor Mittal wants to acquire solely the assets, not the Kremilovtzi as a whole production complex. What does it mean for all 6,000 workers of Kremikovtzi AD, the trademark of Kremikovtzi? It means liquidation."

While Vorskla Steel's socially-minded approach may prove to be popular with politicians and trade-unions, one Sofia-based analyst says that he doesn't think the Ukrainian investor has the financial and political clout to beat the world's largest steel company. On the other hand, there is still time and room for manoeuvre, and the Ukrainian company may prove to have greater resolve in acquiring the ailing plant.

The current expectation is that the court will declare Kremikovtzi bankrupt before September. Following that the assets will be put up for sale in an open tender auction that will be closely scrutinized by the Bulgarian media and Brussels watchdogs.

Whichever side wins, it will still need to settle up with some 10 hedge funds that sit on some €300m of Kremikovtzi bonds. Meanwhile, the main priority for current owners is to keep the steel mill running until the new owner injects new cash and hopefully new life into the troubled enterprise.

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