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The Rupp Report
Jürg Rupp, Executive Editor

More Difficulties For OC Oerlikon

By Jürg Rupp, Executive Editor

OC Oerlikon, parent company of the Saurer textile division, is still facing problems. The company’s plunging stock price brings major shareholder Austria-based Victory Industriebeteiligungs AG, owned by Ronny Pecik and Georg Stumpf, strongly under pressure. They want to get rid of further enterprises to mobilize money again.

The two Viennese speculators rid themselves of one of their bulk purchases yesterday. After negotiations lasting for days, Stumpf and Pecik agreed to sell the Switzerland-based engineering group Sulzer — not textile — block of shares held by Victory to the Russian oligarch Viktor Vekselberg.

The needs of Stump and Pecik have not been met with that transaction. It is already said in bank circles that New York City-based Citigroup wants to put its hands on OC Oerlikon, where the duo is the largest shareholder with 30 percent in shares and 20 percent in options. Citigroup had granted a line of credit of at most CHF 2.5 billion to Oerlikon in June. For a short period of time, it seemed as if Oerlikon would be able to stay out of the headlines with that credit line. Will OC Oerlikon be gone soon, too?

Bad mortgages in the United States and speculative excesses of hedge funds, however, have caused stock exchanges to spin worldwide since then. The stock exchange confusion has led to a brutal collapse of prices at OC Oerlikon, the most important holding of the two speculators. The stock exchange value of the industry conglomerate has halved within a few weeks — a billion values have dissolved into air.

However, the options with which they pushed up the stock price in good times also suffer from consumption. If Oerlikon shares do not improve their performance strongly by the middle of September, many of these options will expire. Dozens of millions are in jeopardy for Stump, Pecik and Victory. Options that entitle to the cover of 10 percent to Oerlikon shares alone expire next month. Bank circles speculate that the duo and other persons affected will again try to push the Oerlikon stock price up shortly before the expiry date to get out of the mess. A similar thing occurred in March. A rise in prices of more than 20 percent within a few short days protected the options from a valueless fall at that time.

The plan for Stump and Pecik to get a little breathing room again is for the Germany-based consortium MW Zander, which was bought last spring for 2 billion euros, to separate from Victory and be sold to OC Oerlikon. The project failed earlier because of the veto from former boss Thomas Limberger, who was fired in May. Stump has accelerated since then, and he wants to initiate the deal as early as October.

Whether Stump and Pecik can sell MW Zander is still uncertain. Some people in Oerlikon management fear that shareholders could sue Oerlikon if Stump and Pecik leave the boat at company expense from MW Zander. Whether Citigroup will allow OC Oerlikon to draw a loan of up to a billion euros for the purchase of a group with controversial value is also an open question.

What’s next is uncertain, and more open than ever for Stump and Pecik, who have already said good-bye to investments in companies including Zurich and Swiss Re insurance companies, as well as Ascom, Sulzer, A Tec and Sky Europe. If OC Oerlikon is the next to go, it will possibly be decided by the banks, which have financed the duo generously for a long time.

There are already the first victims at the base; Oerlikon wants to lay off up to 100 employees.

Clouds Over China
No country has ever turned the world economy more upside down than China. Years ago, one used to say: “If the United States has a cold, the world has a cough.” Today, one could say: “If China blinks with the left eye, the world has a raw material problem.” There are many examples: crude oil, energy, cotton and steel are just a few materials to be mentioned.

What China’s industry in general and its textile industry in particular have built up within the last few years is gigantic. However, China and its trading partners tried to protect their own markets and industries with trade barriers for a long time. Certain countries were, and are, world champions at arguing for and against quotas and import limitations they want to keep. Or for supporting industry or country economic sectors of their own with enormous subsidies.

With the agreements of the World Trade Organization (WTO), trade hindrances and quotas fell, and primarily ready-made apparel and toys are exported in gigantic quantities from China. Other Chinese industries, such as food, also record enormous increases in exports.

The first quality problems of this growth are now occurring for the Chinese industry. Toys and food were exported that contain excessive amounts of pollutants. There already have been strict recall actions, and the nongovernmental organizations are putting a lot of pressure with regard to that issue. Moreover, the quality of other imported goods has become more and more questionable as well. Worries grow, particularly in Europe, as to whether imports from China are still quite safe, and the question of introducing stronger controls looms.

Whether these negative headlines also will affect the textile industry remains uncertain. However, baby articles already have been pulled from store shelves because too many pollutants were found in the garments.

One has to wait and see how China behaves, and if it will become the production shop for all kinds of goods for the whole world in spite of these quality problems. It gets even more thrilling when the per capita income of the Chinese population increases, and when they are able to buy their own goods that were predominantly export-quality products up to now. Then the real problems — bottlenecks, for example — might occur for the global retail business. But not to worry — the other countries of the Asia-Pacific Rim are already on the starting blocks.

August 21, 2007