Changes in the Vallourec Group structure in recent years

One of the major events in recent years was the formation on 1 October 1997 of VALLOUREC & MANNESMANN TUBES (V & M TUBES), a joint subsidiary of Vallourec (55%) and the German company Mannesmannröhren-Werke (45%). As provided by the initial agreement, this merger was completed in May 2000 by V & M TUBES acquiring the Brazilian subsidiary Mannesmann SA, then listed on the Sao Paulo Stock Exchange, in which Mannes-mannröhren-Werke held 76%. Thereafter named V & M do BRASIL, this subsidiary is almost wholly-owned by V & M TUBES after the successful minority buy-out offer in October 2000.

The acquisition by V & M TUBES of the seamless steel tubes business of North Star Steel Company (North Star Tubes) at the beginning of July 2002 increased Vallourec share in the buoyant market for tubes in the energy sector and significantly strengthened its presence in the United States, the market of reference for tubes for oil & gas well equipment. This asset purchase, for a total of USD 380 million (€ 393.6 million), was carried out by a new entity created for this

On 23 June 2005, Vallourec acquired full control of V & M TUBES as a result of the acquisition, for € 545 million, of the 45% stake held by Mannesmannröhren-Werke. This major transaction has given Vallourec:

■full control over the implementation of V & M TUBES strategy (acquisitions, capital expenditure, etc.),

■a more cohesive and clearer Group structure,

■full access to its subsidiary’s results and cash flows.

As a result of these acquisitions, the Vallourec Group is now the world leader in seamless steel tubes (source: in-house and external statistical data). 92.5% of 2006 consolidated sales were made outside France.

In order to control its supplies, V & M TUBES operates three steel mills (in France, Brazil and the United States) and owns a 20% stake in the German steel mill HKM as well as a supply contract entitling it to a portion of the mill’s steel production.

With a view to continuing its expansion in the production of tubes for the power generation market, in 2005 V & M TUBES created a subsidiary, V & M CHANGZHOU, located in Changzhou, China, specializing in the cold finishing of large-diameter seamless alloy steel tubes produced in Germany for power generation plants. This plant was inaugurated at the end of September 2006.

On 30 September 2005, V & M TUBES acquired the assets of the Omsco division of ShawCor Ltd (Canada) and created OMSCO, a company based in Houston, USA, which specializes in the manufacture of drill pipes, drill collars and heavy weight drill pipes.

This acquisition enabled V & M TUBES to become the number two in the world oil & gas drill pipe market. This position was consolidated during the first quarter of 2006 by the acquisition in France of SMFI (Société de Matériel de Forage International), which also specializes in drill collars and heavy weight drill pipes and high-tech products for oil & gas drilling, and a machine workshop for these same products previously owned by GIAT and located in Tarbes, which was integrated into VALLOUREC MANNESMANN OIL & GAS FRANCE. In order to mark the complete integration of drilling products within the Vallourec Group, OMSCO and SMFI changed their

In line with the Group policy of promoting VAM^®premium joints to its customers, the following companies also changed their names during 2006:

■Prinver became VAM MEXICO,

■VAM Premium Connexions became VAM CANADA,

■VAM PTS became VAM USA.

In addition, VAM Changzhou Oil & Gas Premium Equipments Co. Ltd was formed at the end of September 2006 to operate a plant in Changzhou, in China, for threading tubing for the oil & gas industry.

Construction of this plant began in October 2006 and production is scheduled to begin in mid-2007.

The other acquisitions made in recent years have concerned the Valtimet sub-group, a joint venture also created in 1997, the same year as V & M TUBES, in which Vallourec has a controlling (51.3%) interest, its main partner being the US group Timet (43.7%). At the end of 2006, V & M TUBES purchased Timet’s holding and now owns 95% of the share capital, with Sumitomo retaining the remaining 5%.

■In December 2002, Valtimet Inc., a wholly-owned subsidiary of Valtimet, acquired the assets of the US company International Tubular Products (ITP), the main US specialist in stainless steel tubes for condensers.

■In May 2004, Valtimet entered a joint venture with the South Korean company Poongsan to manufacture, in Bupyung, Incheon, South Korea, welded stainless steel and titanium tubes designed mainly for the power generation and seawater desalination markets.

■In November 2005, Valtimet entered a joint venture agreement with the Chinese company Baoti to create Xi’an Baotimet Valinox Tubes Co. Ltd, in Xi’an, in the Chinese province of Shaan’xi.

During 2006, this company will start producing welded titanium tubes for the Chinese electricity and chemicals markets.

■In early April 2006, Valtimet acquired 75% of CST Ltd. This Indian company, which was renamed CST Valinox, is located in Hyderabad and specializes in the production of tubes for power plant condensers for the Indian market.

As regards divestments, the main transactions in recent years have been carried out by the two sub-holding companies ValTubes and Sopretac and, as from 2005, by ValTubes, created as a result of the merger of these two sub-holding companies, ValTubes having itself been absorbed by V & M TUBES at the end of 2006.

■The Industrial Parts division of Sopretac, made up of the companies Métal Déployé SA, Krieg et Zivy Industries and their subsidiaries Métal Déployé Belge, Cablofil Inc., Cablofil Ibérica and Cablofil Italia, was sold in the first half of 2001 to the managers of this division in association with investment funds Atria Capital Partenaires and U.I. of the Crédit Agricole Indosuez group.

■Jacot, part of Sopretac’s Automotive Components division and specialized in manufacturing engine system tubes and parts for power steering assemblies, was sold on 31 May 2002 to the German company Schmitter Group AG for a nominal amount.

■Having taken a majority (51%) shareholding in 1999 in Cefival, a company in the Stainless Steel Tubes division specializing in the extrusion of bars and sectioned shapes, the Italian company Metallurgica Calvi bought a further 20% of the company shares from ValTubes at the end of 2002. ValTubes’s holding subsequently declined to 16.7% after a capital increase by Cefival in which ValTubes did not participate.

■TCVAL is a company specialized in marketing, in France and elsewhere in Europe, stainless steel tubes and fittings for industrial piping, in which Sopretac held 45%. The other 55% was owned by Trouvay-Cauvin, which went into liquidation in December 2002. TCVAL itself went into liquidation in February 2003.

■Sopretac’s 44% stake in No-Sag, which specializes in the manufacture of springs for car seats, was sold in July 2003 to a company specializing in the same type of activity.

■ValTubes’s participating interest (1/³) in D.M.V. Stainless B.V. was sold in December 2003 for a nominal amount to its majority (2/³) shareholder Mannesmannröhren-Werke, which had already assumed full responsibility for its management. This participating interest, previously consolidated by the equity method, had been deconsolidated as from 1 January 2002.

■The subsidiary Vallourec do Brasil Autopeças, which specializes in the assembly of rear axle units for Renault do Brasil and Peugeot Citroën do Brasil, was sold to the German group Benteler on 31 January 2005. In 2004, the company achieved sales of BRL 203 million.

The subsidiary Vallourec Argentina, which specializes in the machining of automotive parts and the assembly of rear axle units for Renault Argentina, was sold to the local management on 8 February 2005 for a nominal price. In 2004 it achieved sales of ARP 62 million.

These assembly activities were not part of Vallourec core business, had not achieved the necessary critical size and no longer presented any real strategic interest.

■At the end of March 2006, Spécitubes, the only company in the Vallourec Group operating in the aerospace sector, was sold to one of Spécitubes’s important customers, the German company Pfalz-Flugzeugwerke GmbH (PFW). Spécitubes has two plants in France, employs about 160 staff and generated sales of € 27 million in 2005.

■Cerec was sold at the end of December 2006 to Eureka Metal Srl, a subsidiary of the Italian family-owned group Calvi, well known to Vallourec since it has gradually taken control of Cefival (see above) since 1999. Cerec, which is based in Recquignies (France), is the French leader in the pressing and forming of metal dished ends used mainly by the chemicals and petrochemicals industries for reservoirs for storing propane and hydrocarbons. Cerec has a staff of 140 and was expected to generate sales of around

€ 30 million in 2006.

■Finally, at the end of 2006 the Vallourec Group announced that it had reached a preliminary agreement concerning the sale to the Salzgitter Group of Vallourec Précision Etirage (VPE).

Vallourec Précision Etirage specializes in the manufacture of cold drawn precision tubes. In 2006, it generated sales of € 219 million, around two-thirds being dedicated to the automotive sector and one-third to other specific industrial applications. The Vallourec Précision Etirage operations include five production plants in France and employ around 1,200 staff.

Vallourec Précision Etirage’s cold finishing operations will complement Salzgitter’s existing precision tubes activities currently operated by its German subsidiary MHP Mannesmann Präzisrohr (MHP) and its Dutch subsidiary Mannesmann Robur (ROB). Under the terms of the agreement, Salzgitter is also to acquire V & M DEUTSCHLAND tube mill in Zeithain (Saxony), thus enabling the combined business of MHP, ROB and Vallourec Précision Etirage to be largely autonomous regarding its supply of seamless tube hollows.

The planned transaction, which the two groups believe to be

With the aim of simplifying the structure of the Vallourec Group by reducing the number of sub-holding companies, already reduced from three to two at the end of 2004 (merger by absorption of ValTubes by Sopretac, which was then renamed ValTubes), ValTubes was itself absorbed, as well as Setval, by V & M TUBES, which is now the Group only sub-holding company.

Parent company-subsidiary organization

■ Vallourec is a mixed holding company that:

– manages its participating interests. Its income is mainly financial, such as dividends, interest on long-term loans to subsidiaries and investment income from cash and cash equivalents. It also bears the cost of its debt;

– bears operating and brand protection costs. In accordance with general Group policy, the image of the Group belongs to Vallourec and ownership has not been transferred to the subsidiaries.

Vallourec charges royalties in exchange for the use of its brand by its industrial subsidiaries and V & M TUBES;

– does not carry out any industrial activity.

■ V & M TUBES is a mixed sub-holding company that manages its participating interests and does not carry out any industrial activity. Until 2005 its income was mainly financial, such as dividends, interest on long-term loans to subsidiaries and investment income from cash and cash equivalents.

Following the merger by absorption of Setval, which was carried out with retroactive effect from 1 January 2006, V & M TUBES took over part of Setval service activities including, in particular, the management of the Group and its administrative departments. As at 31 December 2006,V & M TUBES employed a staff of 115.

V & M TUBES invoices the Group subsidiaries in France and abroad for the provision of services.

In addition, V & M TUBES bears the operating costs linked to its brand. V & M TUBES charges royalties in exchange for the use of its brand by its industrial subsidiaries.

Goods and services are provided at arm’s length between Group companies and, consequently, are not affected by the provisions of Article L. 225-86 of the French Code de Commerce.

4.1.1 Description of main