Merger blow to building sector

Construction firms PIA Piasecki and Mostostal Zabrze called off their planned merger last week, blaming Poland's declining market for being unable to support a new construction conglomerate.

The directors of PIA Piasecki and Mostostal Zabrze said in a joint statement that financial analyses of both companies showed merger plans to be economically unjustifiable. They said macroeconomic conditions in Poland and the continuing decline of the construction industry were worse than expected when the merger agreement was signed in June this year.

PIA Piasecki spokesman Wojciech Sośnierz said the poor results of large construction companies like Exbud Skanska or Budimex weighed against the merger. "Medium-sized companies have a much greater chance of generating returns for shareholders," Sośnierz said.

Industry observers also blamed the need for radical restructuring at Mostostal Zabrze and the firm's worsening financial condition for the failure of the merger. "For Mostostal Zabrze, the adoption of the corporate culture of PIA Piasecki would have been a great benefit." said Arkadiusz Skowroń, construction analyst at Dom Maklerski WBK.

Mostostal Zabrze saw net profits of zł. 3 million ($714,000) turn to losses of zł. 31.7 million ($7.3 million) in the first half of this year. A new board of directors, appointed in May, was forced to create reserves of zł. 38.4 million ($9.4 million) to cover outstanding payments from its contractors and as security against its ailing subsidiaries. Maja Lidke, PR director of Mostostal Zabrze, denied the merger was doomed as a result of the firm's financial standing. "Market conditions are the main reason that the merger did not take place," Lidke said. "All construction companies are in poor condition, not just ours." She declined to say how the cancellation would shape the firm's future business strategy.

PIA Piasecki only managed to break even during the first half of this year despite boosting sales to zł. 80 million ($19 million) from zł. 52 million ($12.3 million) a year ago. Market observers said breaking into new markets was a crucial element of the merger for PIA Piasecki. "The entry of PIA Piasecki onto the road construction market no longer seems possible," Skowroń said.

Sośnierz said that with full order books for 2002, the cancellation of the merger will have a limited impact on PIA Piasecki, "We think that we will manage a lot better on our own," Sośnierz said. "Our company has always been private and is not burdened with the need for heavy restructuring." He said details of all changes to the firm's business strategy resulting from the canceled merger would be announced this week.