Clare Nuttall in Bucharest -
Croatia's competition authority handed conditional approval to food and retail giant Agrokor's takeover of supermarket chain Mercator on April 14. Although it comes with tough conditions attached, the move brings the Croat company a step closer to sealing the long-winded deal, which will create a major regional supermarket chain with revenues of up to €7bn.
Under a new deal struck in February, Agrokor will pay €86 per share for a majority stake in Mercator. The deal values the Slovenian company at a total of €323.8m, and was agreed after a deadline for Mercator's debt restructuring had expired.
Therefore, the price is below that previously agreed by the same pair in June. That would have seen Mercator sold at €120 per share. Agrokor has also agreed to a €225m capital increase for Mercator, which was not included in the original deal. The approval comes less than a week after Agrikor's April 10 announcement that it has secured a €600m financing facility from Russian state-controlled giant Sberbank.
Combining the two companies will create one of the biggest retail chains in the Central and Eastern Europe region. It should put Agrokor - owner of Croatian retail chain Konzum - in a position to compete with major European supermarket operators. After the takeover, Agrokor's workforce will approximately double to around 60,000 staff.
Croatia's largest private company, with consolidated total revenues of HRK30bn (€3.9bn) in 2012, in addition to Konzum, Agrokor companies lead the Croatian market in ice cream (Ledo), margarine (Zvijezda) and mineral water (Jamnica). Agrokor's website states that the company's "long-term strategic objective [is] a key position throughout the region."
It's little wonder then that despite offering a green light, Croatian competition watchdog AZTN is attaching tough conditions. The agency warns that the acquisition will strengthen Konzum as the leading player in the market, which will increase both "asymmetry of the market" and Koznum's purchasing power with suppliers.
Agrokor's position as a vertically integrated company that is both a retailer and food supplier is of particular concern, AZTN suggested. It warned that the "merger would additionally strengthen the negotiating power of Agrokor towards suppliers of undertaking Konzum on one hand, and in relation to buyers of the food production chain of the group, on the other hand."
The regulator says Agrokor has agreed to "strict and comprehensive measures and conditions" to prevent "negative effects of the concentration on competition" resulting from the deal. This will include divesting 96 stores from the combined network of Konzum and Mercator in Croatia. The revenues from those outlets to be divested is equal to almost 60% of Mercator's 2012 revenues in the country.
Still, the Croat offer of approval is a key step for the long-winded deal to final go through. Competition authorities in both Slovenia and Serbia, where the two companies also have operations, gave their go ahead to the takeover in December.
A Euromonitor report from 2013 notes that the Slovenian grocery retail market is already "highly consolidated with the leading three retailers controlling the majority of retail value sales", though consolidation dropped slightly with the entry of discounters to the market. Meanwhile, conclusion of the deal will leave Serbia with Agrokor and Delhaize as the only two serious competitors in the grocery retail market.
"It is quite possible that these two retailers will now pursue a similar commercial direction, creating a duopoly, especially in terms of price and range of goods offered," the report warns. "However, it is unlikely that a price war will erupt, with price increases more likely as these two retailers seek to generate profits."
Mercator operates 1,571 stores in five countries - Slovenia, Croatia, Bosnia and Herzegovina, Serbia and Montenegro. It expanded rapidly during the 1990s and early 2000s, gaining a boost from Slovenia's entry to the EU and adoption of the euro. However, it was hit by the international financial crisis, and in 2012 announced plans to exit investments in Albania and Bulgaria.
The acquisition by Agrokor will create a chain of up to 2,600 stores across the region, though in addition to the divestitures ordered by AZTN, consolidation within the group is expected. According to Fresh Plaza, Agrokor is planning to shut down Konzum stores in Serbia and Montenegro to focus on building up the existing Mercator network.
Retailers across the region have been hit by the international economic crisis, though grocery retailers have suffered less than other market segments as consumers cut back on non-essentials. The markets in both Croatia and Slovenia are considered to have medium-term potential, but are currently suffering from minimal growth.
The IMF forecasts Croatia's GDP will contract by 0.6% in 2014, before returning to growth of 0.4% next year. Meanwhile, Slovenia is expected to expand by 0.3% and 0.9% in 2014 and 2015 respectively.
Other markets in Southeast Europe have lower purchasing power and show greater potential for growth. Serbia in particular is expected to get a considerable boost when it joins the EU.
"Taking into account the very poor purchasing power of Serbian consumers, the domination of grocery retailers in terms of total value sales is unsurprising as the average Serbian family still spends most of its budget on food and utilities," says Eurmonitor's report.
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