Eastern Europe Tries To Stoke Up Its Fire Sale

Stanislaw Krol, general manager of the Polish steelmaker Huta Warszawa, is sitting on pins and needles. An Italian steel manufacturer, Lucchini, has signed a letter of intent to buy a majority stake in Krol's state-owned company for $162 million. But the government still must approve the sale. And that's no small matter.

During Lucchini's first attempt to clinch the deal in July, Poland's Industry Minister quit the day the Italian company's team arrived in Warsaw from their headquarters near Milan. Then, during Lucchini's second attempt in September, Prime Minister Jan Krzysztof Bielecki offered to resign, throwing government decision-makers into chaos. "We gave the government an offer on a silver platter. All we need is their blessing," groans Krol.

JUST A TRICKLE. Now, the steelmaker's very existence, and the jobs of its 5,500 workers, are at stake. A severe recession and the collapse of sales to the Soviet Union have already forced Huta Warszawa to slash production by 22% this year. Burdened by mounting losses and outdated production technology, the steelmaker is desperately in need of foreign cash and knowhow. But without Warsaw's assent, none will arrive. Such is the condition of hundreds of large companies in Eastern Europe, as the privatization process bogs down in political logjams.

Hundreds of thousands of privately owned shops, restaurants, and small businesses have sprung up since the revolutions of 1989. But the expected torrent of sales of bigger state companies to Western investors is still more like a trickle. In the former East Germany, 3,300 companies have been snapped up since unification a year ago. But fewer than 100 of the 14,000 companies up for sale in Hungary, Poland, and Czechoslovakia have been sold. So, faced with crumbling economies and mounting layoffs, Eastern Europe's indecisive leadership now appears ready to make one last try.

Instead of continuing to haggle incessantly over how best to sell the most companies at the highest price, Eastern Europeans are getting ready to open the fire sale of the century. Hungary and Czechoslovakia are leading the sales campaign. Even Poland is trying makeshift sales tactics, despite preelection governmental paralysis. But in all cases, the region's new leaders now realize that they may not get a second chance to turn their economies around. Says World Bank Vice-President Willi A. Wapenhans: "The most expensive option would be the loss of momentum."

Despite investors' well-founded qualms, Eastern Europe still has something to offer Westerners (table). Although they require extensive refurbishing, such gems as Hungarian lighting maker Tungsram and Czech auto maker Skoda, with well-known brand names and skilled workers, sold quickly. Many investors still see the region as an ideal low-wage manufacturing center for exports to the rest of the world. That's why Gerber Products Co. purchased 60% of Eastern Europe's leading fruit-juice and baby-food maker, Alima of Poland, for $11.3 million on Oct. 3. PepsiCo Inc. and French electronics maker Thomson have cut other Polish deals for similar reasons. Thomson is now exporting color-TV picture tubes to Western Europe. It plans to expand the plant's capacity from 700,000 to 2 million tubes a year.

RUBBER STAMP. If some privatizers get their way, more such sales will soon move into the express lane. To no one's surprise, Hungary is taking the most aggressive tack. Hungarians experimented with market reforms for years before communism's fall. But now that capitalism is the official order of the day, the State Property Agency (SPA) has enlisted 85 investment banks and consultants, including Price Waterhouse, Coopers & Lybrand, and Nomura Securities, to help sell 400 medium-size companies.

The program, called "self-privatization," will allow the 400 to look for buyers on their own and avoid much of the micromanagement that has become a hallmark of SPA deals. "It's obvious the bureaucracy is a bottleneck," says SPA chief Lajos Csepi. If the experiment goes well over the next three months, half of Hungary's 2,400 state enterprises--the ones that stand the best chance of survival--will be handed over to the 85 advisers to sell. "If the SPA really delegates the decision-making, we can do deals in three months instead of a year," says Mark Rae, a Budapest-based lawyer for New York attorneys Stroock & Stroock & Lavan.

Czechoslovak federal officials are taking an even more radical tack. In January, they plan to begin selling more than 1,770 companies based on privatization plans worked out by company managers. But companies that can't be sold quickly or easily--perhaps half the nation's manufacturers--will be all but given away through a complex bidding plan.

Any citizen interested in bidding will be allowed to purchase coupon booklets for $33, a price the Czechs hope will cover the cost of setting up the program. The coupons will be good for shares in companies or mutual funds. Czech officials estimate that roughly half the country's manufacturers will be transferred to private ownership in 1992 through the coupon scheme.

Although the giveaway plan provides no new capital or Western management, it will shift overnight the problem of survival from the government to the new owners. Eventually, the shareholders should be able to sell their shares in a new stock market. "No matter how hopeless our managers and how clueless our new stockholders, they will be more inventive in finding solutions than the government," says Deputy Finance Minister Dusan Triska.

While Hungary and Czechoslovakia are experimenting, Poland, once the fastest reformer of the three, now lags behind its neighbors. The Poles' grand scheme to sell 400 big companies in one swoop is mired in the country's political deadlock. As a result, managers and investors are grumbling that the government's plan for mass privatization has become lost in a Bermuda Triangle between the Finance Ministry, the Privatization Ministry, and the Industry Ministry. But in the cramped, spartan offices of the Privatization Ministry, a squad of young Western consultants and Poles are struggling to keep their dream alive. They are offering investment bankers and consultants clusters of companies within single industries to put together and streamline.

EXTRA COSTS. In May, for example, the Ministry gave Bankers Trust Co. the right to sell two chemical companies and ordered a strategic review of the industry's remaining 75 companies. Bankers already has lined up buyers for the initial pair and expects the deals to close by Dec. 31.

But even if the new schemes can quicken the sales pace, full-scale privatization will remain elusive. Across the region, commercial banking and stock markets still are rudimentary. Companies carry billions in bad debts accrued during 40 years of communist rule. Hazardous waste plagues many more. And scores carry the extra costs of providing such social functions as medical care, day care, and housing.

When Pepsi bought Polish chocolate-maker Wedel for $25 million in August, for example, it took on a health clinic, a rehabilitation center, two nursery schools, a recreation center, several hotels, and housing for retirees. Pepsi is retaining most of the social services, since alternatives do not yet exist.

Pepsi's not the only Western investor to run into unpleasant surprises. Just after Volkswagen took over Skoda last March, the Czechs slapped a high sales tax on new cars. Sticker shock drove Czechs to import 80,000 used cars in the first nine months of the year, causing Skoda's domestic market to collapse. Then there's Michigan-based Guardian Industries Corp., which owns 80% of a Hungarian joint venture in making glass. Since it closed its deal in 1989, it has battled to get local authorities to repave roads leading to its plant, and has chafed at a shortage of phone lines. It also has been hard hit by the collapse of demand in Eastern Europe.

Despite such headaches, VW and Guardian are sticking it out. That kind of attitude is what Eastern Europe needs most right now. As the euphoria of 1989 fades, Eastern Europeans are beginning to realize that reconstruction will be more taxing than the worst pessimists ever thought. If privatization is to work, even more inventive solutions will be needed--and quickly.


Volkswagen buys Czechoslovakia's Skoda and BAZ, General Motors moves into eastern Germany. GM, Fiat, and Peugeot-Citroen vying for Poland's FSO


P&G buys Czech detergent maker Rakona. Henkel, Unilever, and Colgate-Palmolive close behind


Siemens, Westinghouse, ABB vying to team up with Czechoslovakia's Skoda Pilsen on power plants, transportation


Germany's Korf and Metallgesellschaft buy Hungary's OZD Steel


France's Sanofi buys Hungary's Chinoin for $75 million


Siemens, Alcatel, Ericsson selling switches. Ameritech, France Telecom, Bell Atlantic, U. S. West building cellular-phone and digital data networks


Hungary's Malev, Poland's LOT Czech's CSA airlines being readied for sale. Germans proposing private toll roads