27 October 1997

Editor's Notepad (The Wall Street Journal Europe)

Business opportunities can come in strange guises. Gelu Tofan, casting around for a fresh start after 1990, was determined to leave Romania, but the U.S., Canada and South Africa all turned him down for visas.

So the former factory foreman stayed home and stuck to what he knew best, tires. Living out of his car and office, he went after the weakest link in Romania's

tire industry: distribution. Starting in the country's farthest-flung regions and working back toward Bucharest, he quickly built a humming business by delivering directly to factories and helping them to cut out the state middleman.

Six years later, Tofan Grup is a $300 million business, with Nomura on board as a financial investor, and tentative plans to tap the markets by the end of next year. We tell Tofan Grup's story, and those of six other post-1990 start-ups, beginning on page 21.

Start-up businesses have a way of falling through the cracks. Banks in the region, focused on retail business and blue-chip corporates, don't tend to lend to them. Business journalists, equally focused on the same big, listed companies, don't tend to write about them.

But as any fund manager will tell you, new-company initial public offers -- and pre-IPO investments -- have been among the hottest plays in Central Europe. And the start-up sector, skewed heavily toward information technology and other services, promises to throw up the kind of companies that will lead the region beyond traditional heavy industry.

Our roster is anything but comprehensive, and it's risky business trying to say which company will be the next to rival Poland's ComputerLand, and which a flash in the pan. Indeed, new businesses typically reach a critical point a few years into the business, when entrepreneurs must become responsible managers -- or hand the job over to someone else.

The challenges are evident at Tofan, where Mr. Tofan told me that his growing company has had to focus more attention on areas like human resources, and invest in upgrading his products for the kind of quality he'll need to fend off competitors.

We wish him, and the other businessmen we profile, the best of luck.

---

As overrated ideas go, it's hard to beat the "German menace".

When the Berlin Wall came down, plenty of commentators in (and outside) the region raised loud -- and, given history, perfectly valid -- fears of German domination. In fact, a handful of big investments aside, the Germans have been conspicuous mostly for their absence.

No longer. As we report in our country focus, Germany's politicians and captains of industry are finally focusing their attention, and their money, on the East. German investments in Poland of more than $1 million have more than doubled since 1995, and Germany trades more with the region than it does with the U.S.

Forget the old stereotypes of domination by force, too. While older folk nurse historical wounds and begin reconciliation, Central Europe's club kids are dancing to German techno music, and Germany is seen as a model of economic success throughout the region.

Reed John. "Editor's Notepad." The Wall Street Journal Europe 27 October 1997: 3.

Cover Story - Burning Rubber (The Wall Street Journal Europe)

Company: Tofan Grup

Country: Romania

Estimated `97 revenues: $300 million

When his countrymen toppled dictator Nicolae Ceausescu in 1989, Gelu Tofan was ready for a fresh start abroad. But the U.S., South Africa and Canada all turned him down for visas. So Mr. Tofan stayed home, and stuck to what he knew best: tires.

The former factory foreman saw an opening in Romania's shoddy distribution system, which doled out tires under quotas, often met late if at all. Starting with a $40,000 loan and living out of his office and car, Mr. Tofan went straight to big industrial customers, delivering directly to factory courtyards and helping them to jump the queue.

Six years later his company, Tofan Grup, is Romania's biggest tire producer, with an estimated 70% market share for production and 85% of distribution. It's also the only major tire maker in the region still controlled by a local investor.

The achievement is doubly remarkable in a country where "businessman" is often used as a dirty word and many of the fortunes made since 1990 have come under official scrutiny. Observers say Mr. Tofan built his empire on grit and hard work, not cronyism and connections; company officials are quick to point out that government anti-graft investigators combed its books (like those of many other private companies) but found nothing to investigate.

Just two years after plunging into distribution, Mr. Tofan had a nationwide business, and big enough cash flow to build a greenfield retreading plant outside Bucharest. At end-1995, he launched a successful $35 million bid for 51% of Danubiana S.A., his former employer and Romania's biggest tire maker. Looking to gain controlling stakes in two additional factories, Mr. Tofan went shopping for a strategic partner, eventually hooking up with Nomura International PLC, which took a 49% stake this year for $60 million.

Analysts give the 36-year-old Mr. Tofan high marks for his energy and shrewd business sense, but warn that the sprawling conglomerate will be tough to manage. "I'm not sure he can swallow such a big piece of cake," says Lucian Perl of Danube Fund, a local venture capital fund.

That may be, but Tofan isn't through growing yet. In a bid for vertical integration, the group is negotiating to take majority stake in a state research company for tires, plus two rubber and steel companies. It's also investing heavily in modernization in an effort to bring its tires up to Western quality standards, and is mooting an initial public offer, probably by the end of next year, for as much as 33% of the company. All in all, not bad for a start-up.

Reed John. "Burning Rubber." The Wall Street Journal Europe 27 October 1997: 22.

01 October 1997

Global Tyre Report (European Rubber Journal)

International tire companies have acquired the best of eastern Europe's tire makers, but local players can still make money out of the remaining factories table ranking the top 7 Eastern Europe tire makers by 1996 sales, with 1994 and 1995 sales.

While international tire companies have acquired the best of eastern Europe's tire makers, local players can still make money out of the remaining factories. For example, Tofan Grup SA (Bandag, Romania) has quietly acquired majority control of Romania's 3 largest tire makers, Danubiana SA in Bucharets, Victoria SA in Floresti, and Silvania SA in Zalau. The 3 plants, plus the Bandag plant, produce 15,000 units a day. Groupe sales rose to $100 mil in 1996. The acquisitions of Victoria and Silvania in 1997 will more than double sales. The full-text article discusses the companies in the East Europe market and provides a table ranking the top 7 Eastern Europe tire makers by 1996 sales, with 1994 and 1995 sales. When the 1997 global Top 50 tyre company rankings are published next year, the name 'Tofan' will debut among the top 35 companies, boasting sales of more than $200 million.

"Who?" or "What?" is Tofan, many will ask.

What started out six years ago as a handful of retail locations and later a Bandag retreading franchise has grown into a tyre manufacturing and distribution company boasting more than two-thirds of Romania's manufacturing capacity and annual sales of $200 million.

Tofan Grup SA is a privately-owned Romanian enterprise, founded and directed by 37-year-old Georghe Tofan, who quietly has bought majority control of Romania's three largest tyre producers, Danubiana SA in Bucharest, Victoria SA in Floresti, and Silvania SA in Zalau. Daily production from these three tyre plants, plus the Bandag plant, is 15,000 units. The group recently launched an in-house developed all steel truck radial, being produced by Silvania.

Group sales grew more than 80 percent last year to $100 million, and the additions this year of Victoria and Silvania will more than double the 1997 sales figure exports are expected to represent up to one-quarter of sales, including $10 million in sales to the US.

The purchases of Victoria and Silvania were underwritten partially by Nomura Securities International, which arranged $100 million in financing for Tofan's growth projects.

To date, Tofan has not linked with any western tyre maker, either commercially or technically, but it shouldn't be long before the courtship process begins.

Tofan's sales efforts received a boost recently when Victoria and Danubiana were among four eastern European firms selected by Titan Tire Corp of the US for offtake production of Titan agricultural tyres, primarily for the European market. Titan also has signed off-take deals with Romania's Rotras SA and Ukraine's Valsa.

Tofan's sales are nearly even with the other remaining independent central/eastern European tyre maker, Matador AS.

Elsewhere in E. Europe

With one main plant in Slovakia, a satellite factory in Russia, more than $250 million in annual sales, and a reputation for engineering competence, Matador is considered a viable potential candidate for partnering with one of the major global producers. Bridgestone Corp and Matador have held exploratory talks, but have not come to any conclusions. One stumbling block to a partnership with Matador appears to be the Slovakians' insistence that the firm's non-tyre activities--conveyor belts and other general rubber goods--be included in any deal being negotiated, sources familiar with the situation said.
Elsewhere in the region, investors in Mitas AS and Beltyr spo in Czech Republic have pooled their resources and created a holding company, called Czech Rubber Co., for these two small tyre plants, and some other non-tyre activities.

Mitas in Prague formerly was part of the Barum Holdings group, and Beltyr is the renamed Barumtech in Zlin, a spinoff of Barum Continental.
Otherwise, the 'cream' of central Europe's tyre manufacturing has been skimmed off by Michelin, Goodyear and Continental. Their purchases of Barum, Stomil Olsztyn, TC Debica and Sava Rubber mean they control roughly one-half of the estimated $2200 million in tyre sales in the region (excluding Russia, for which reliable sales data are not available).

Further east, Ukraine's Rosava has secured preliminary guarantees for more than $50 million worth of equipment and assistance to modernise and expand the Belaya Tserkov factory, while Belarus's Belshina Tyre Combinat in Bobruysk has secured an off-take production contract with Sweden's Trelleborg Industri, for heavy-duty tractor and implement tyres.
Rosava (formerly Belotserkovshina) is proceeding with an in-house directed project to improve radial car tyre production, according to the equity research firm Wood & Co, which said most of the new equipment will come from Japan's Mitsubishi Machinery.

Rosava is one of only three factories in the former Soviet Union with steel-belted radial car tyre manufacturing capacity, and its annual capacity of 4.4 million units is comparable to Nizhnekamskshina, the larger of the two Russian tyre plants with radial capacity (the other being the Matador/Omskshin joint venture in Omsk).
Rosava and the other two Ukrainian tyre manufacturers, Dniproshina in Dnepropetrovsk and Valsa in Belaya Tserkov, are privatised, but still with measurable government share ownership, according to a Wood & Co study of the Ukrainian chemical industry.

Outside interest in the company is expected to be piqued by an upcoming tender offer for 40 percent of the firm's stock, according to the Wood study, which also evaluated Rosava as 60-percent undervalued, when compared with Polish or Russian tyre makers. Rosava has reduced employment by about one-third in the past few years, to 8400 currently.
At Belshina, Trelleborg technicians spent a year at the Bobruisk plant, training the staff and preparing the factory for Trelleborg-quality production. Production was 'low volume' at first, but is scheduled to build up gradually throughout 1997.

Trelleborg also has helped Belshina with production technology and training of personnel in 'western' manufacturing methods. The Swedish company also coordinates procurement of raw materials for the off-take production.
Belshina employs 16 000 at a complex of four factories in Bobruisk, about 135 km southeast of Minsk. Capacity for car, truck and farm/OTR tyres at the 25-year-old plant is listed as 5 million units a year.


Prospects for Ukraine's other major producer, Dniproshina, are less clear, the Wood study concluded, although management there has invested considerably in recent years to build up car tyre output as a complement to the unit's traditional heavy truck and agricultural tyre heritage. The firm reported a pre-tax profit of 14 percent of turnover last year, said Wood.


TOFAN GRUP HOLDINGS

Danubiana SA - Bucharest
- cross-ply car, truck and tractor tyres
Victoria SA - Floresti - radial and cross-ply car, truck and tractor tyres

Silvania SA - Zalau - radial truck tyres

Bandag Retreading Plant - Bucharest

Retail Locations 41


Note: All figures in US $mil.
EASTERN EUROPES'S TYRE MAKERS--TOP 50 TURNOVER

(In millions of US dollars) Co. (Location)/owner 1996 rank 1995 1994 rank

Barum/Continental 357 ** 345 ** 230.0 **

Dniproshina (Ukraine) 260 24 n.a. -- n.a. --

Stomil Olsztyn/Michelin 232 ** 196 29 146.6 34

TC Debioa/Goodyear 224 ** 196 29 141.1 36

Rosava (UKR) 197 33 n.a. -- n.a. --

Matador 193 34 196 29 166.3 31

Sava 177 37 159 39 144 35


JOURNAL-CODE: EURRUJOG
LOAD-DATE: December 17, 1999