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. Last Updated: 07/27/2016

Russia-Cozy Borsod Scares Off Investors

BUDAPEST, Hungary -- Just a decade ago, it was little more than a loss-making, state-run PVC maker.

As Central Europe ditched communism and embraced the free market, the ownership of Hungarian chemicals firm BorsodChem has changed completely.

Despite the change, the company has kept its eye on a long-term strategy switch from commodity chemicals to high value-added speciality products.

Now under new Russia-friendly ownership, it is heavily focused on speciality products aimed at the vast Russian market.

The price of a bruising takeover battle has been to lose the international investors who once rated it one of their favorite Central European stocks.

In the early 1990s, BorsodChem had 62 percent of its sales in price volatile polyvinyl-chloride, or PVC.

Next year, it expects nearly two-thirds of revenues to come from non-cyclical speciality chemicals like MDI and TDI, raw materials for polyurethane foam production.

"It's been BorsodChem's strategic intention to open to a business which is not commodities," CEO Laszlo Kovacs said at the opening of a new 125 million euro ($110 million) TDI plant in October.

In the chemicals industry, PVC is viewed as a commodity, highly exposed to price fluctuations.

MDI, methylene diphenyl diisocyanate, which BorsodChem has quietly been producing for 10 years, and the newer TDI, toluene diphenyl diisocyanate, are noncyclical speciality chemicals, with largely predictable demand and supply.

"Since the early 1990s, they have consciously increased the proportion of higher added value products within sales and they have adjusted all their investments to this strategy," said Peter Tordai, analyst at IE-New York Broker.

From going public in 1996 to late last year, BorsodChem was owned mainly by financial investors, including the European Bank for Reconstruction and Development.

In September 2000, Ireland's Milford Holding, a proxy for Russian energy giant Gazprom, raised its stake to 24.8 percent from below 1 percent.

The move shook up Hungary's chemicals sector and, because of uncertainties over BorsodChem's shareholder structure, came as a wake-up call to market regulators apparently unaware of the dangers of hostile takeovers.

It triggered changes in Hungary's capital market rules.

A year on, BorsodChem is now in the hands of Austria's CE Oil & Gas and Russian petrochemicals firm Sibur, both seen as Gazprom proxies. Together they hold over 80 percent and are keen to swing BorsodChem's business focus to Russia.

The changes have taken their toll on BorsodChem's stock.

Early on Dec. 5, BorsodChem shares traded at 4,700 forints, just more than half their September 2000 level when Milford made its move.

One analyst, who asked not to be named, said that even with very low margins between PVC and raw material ethylene prices -- the margin fell 50 Deutsche marks in January-September 2001 from 460 marks a year earlier -- BorsodChem's stock looked cheap.

"On a discounted cash flow model, it's obviously very cheap, even if it is in the bottom of the [chemical] cycle," the analyst said. "But this doesn't really matter as there's no liquidity in the stock, and small shareholders are completely at the mercy of the bigger owners," he said.