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International equity: Buyer beware

Nine months of takeover madness in the Czech Republic has left foreign and minority investors bewildered. Their rights have been ignored frequently by voucher funds trading blocks of shares privately among themselves. Now new regulations are in place to try to curb excesses in the Prague equity market. But their calming effect on one of the wildest emerging markets will at best be limited. Brian Caplen reports

Investors were warned off Czech steelmaker Trinecke Zelezarny following its takeover by a domestic investment vehicle known as Moravia Steel. A Prague-based analyst advised selling the stock because of fears about where profits generated by Trinecke Zelezarny might end up. What worried Patria Finance analyst Charles Kulp was the prospect of profits being transfer-priced out of Trinecke Zelezarny - an increasingly common practice in the Czech Republic - and used by Moravia Steel to pay debt taken on to fund the acquisition.

"Due to the ... uncertainty of the contract conditions between Moravia Steel and Trinecke Zelezarny, we choose to be cautious with this stock and recommend that investors sell their shares," said Kulp's report, which described how Moravia Steel would handle financing and management of between 60% and 70% of all major raw material purchases such as iron ore, scrap iron and coal; supervise sales of about 90% of final products; and make arrangements for most services. "This arrangement will probably generate improved Trinecke Zelezarny sales. However, because Moravia Steel will set prices for sale of raw materials (purchased by Moravia Steel and sold to Trinecke Zelezarny) and final products (produced by Trinecke Zelezarny and sold to Moravia Steel), it is not clear that Trinecke Zelezarny will gain an appropriate share of profit."

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