Croatia's Agrokor failure to grow leaves it vulnerable

By bne IntelliNews May 17, 2011

Guy Norton in Zagreb -

If at first you don't succeed, try, try again.

Nobody could ever accuse Ivica Todoric, owner of Croatia's biggest private company Agrokor, of being a quitter. In recent years, he's tried to snap up supermarkets in Russia, Serbia, Turkey and most recently Slovenia, in an attempt to catapult his food and drink empire from being a big fish in the small but profitable Croatian retailing pond, to one with true international scale and reach. But on each occasion he's failed to land his acquisition target, leaving him increasingly vulnerable to competition from major global retailers that have either already entered or are considering entering the retail arena in Southeast Europe.

Todoric's latest setback came with the news on May 4 that Slovenian brewer Pivovarno Lasko Group had declined its offer to buy the 23% stake in Slovenia's leading supermarket chain Mercator Poslovni Sistem that it holds. If Agrokor's bid had been accepted, it would have netted Pivovarno Lasko nearly €200m and enabled it to make substantial progress in cutting its €450m debt mountain down to size.

Much to Todoric's frustration, however, the Slovenian competition regulator put the kibosh on the deal when it slapped an injunction on any sale of Mercator shares by Pivovarna Lasko and a number of Slovenian and international banks. Todoric had previously been favourite to land the stake put up for sale by Pivovarna Lasko after it trumped offers by private equity players Mid-Europa Partners and Warburg Pincus, with Agrokor bidding €221 per share. Although the Croatian tycoon's pitch was the most generous, it quickly unleashed a wave of protests in Slovenia from farmers, trade unions and politicians that made the takeover bid front-page news for weeks on end in March and April.

Not Mr Right

While few questioned the financial attractiveness of Agrokor's bid - it represented a roughly 25% premium to where Mercator's shares were trading on the Ljubljana Stock Exchange at the time - the main point of contention was whether Todoric's Agrokor would be a suitable owner of Mercator, which many Slovenian regard as a national treasure.

Among the first to voice concerns about Agrokor's intentions was Slovenian Agriculture Minister Dejan Zidan, who feared for the future of Slovenia's food industry if Agrokor's bid was successful. Agriculture and food production employs roughly 100,000 of Slovenia's 1.9m population and Mercator alone buys around 40% of all the food produced in the country. Agrokor not only owns Konzum, Croatia's biggest supermarket chain, but is also a major food producer in its own right. Zidan expressed fears that Slovenian products would be forced off Mercator's shelves if Agrokor managed to eventually wrest control of the retailer. "It is certainly a legitimate interest of the Slovenian government to support our food producers and to have a company [Mercator] that will continue to expand and develop on other markets in the region as an independent company," Zidan told Slovenian business news portal

Another politician to weigh into the debate on the rights and wrongs of selling Mercator to Agrokor was former economy minister Matej Lahovnik, who while conceding that Pivovarna Lasko needs to offload its stake in Mercator to help clear its debts, questioned the wisdom of selling the highly profitable Mercator to the highly indebted Agrokor. In 2010, Mercator's net profit surged 44% to €30.4m, making it an attractive source of cash flow for Agrokor, which has to pay off a €550m high yield bond in 2016 on which it's paying a hefty 10% annual coupon. Commenting on Agrokor's bid for Mercator, Lahovnik said: "It looks like a sick tiger wants to eat a healthy tiger so that he can become powerful again."

Todoric did at least enjoy the support of his own government though, with Croatia's agriculture minister, Petar Cobankovic, telling Croatian daily Jutarnji List: "All those who want to invest in Croatia are welcome, and we expect the same treatment for our businesses who want to invest abroad, including Agrokor."

With the Slovenian competition authorities having at least temporarily frustrated Todoric's advances, the question now is where both Agrokor and Mercator go from here.

In Slovenia, the favoured option is that Pivovarna Lasko and Mercator's Slovenian bank creditors pool their more than 50% holding Mercator and offer it for sale in a new public tender later in the year, in the hope of attracting an offer from a cash-rich major global retailer. On May 10, Finance Minister Franc Krizanic told Delo newspaper that Pivovarna Lasko and the other owners of Mercator would probably organise another sale of the retailer by the end of the year, and that Mercator should be bought by a "strong and strategic" company. Lahovnik has called for any future bid for Mercator to preclude it being bought by Mercator's direct rivals in Southeast Europe.

Meanwhile, Todoric it seems has not given up hope of securing at least a slice of Mercator. According to Croatian weekly Vjesnik Agrokor, Todoric is considering building up a position in Mercator through the purchase of shares on the Ljubljana Stock Exchange. Agrokor believes a tie-up of its retail chain Konzum and Mercator "would create the most successful retail company in the region."

Through this merger, Agrokor would go some way to bolstering its business against the influx of retail giants that are entering the region, attracted by its 28m aspiring consumers. "During the last few years, the region has experienced a 'retail revolution'," says GFA Consulting Group. "Supermarkets and hypermarkets have been opened, and consumption has strongly shifted from smaller shops and groceries to supermarkets. This trend seems to have been accelerated during the food price crisis in 2008 and the financial crisis in 2009."

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