Purcari Wineries Group, the first ever Moldovan company to hold an IPO, is looking at acquisition targets to boost its business in Romania and Central Europe.
The IPO came after a period of rapid expansion as Purcari refocussed on Romania and Central Europe. It plans to make further inroads into the region, where the wine industry is currently fragmented, and is benefitting from a shift in consumer preferences from beer and spirits to wine.
Coming on the heels of a series of private-sector IPOs in Bucharest, Purcari’s IPO was more than four times oversubscribed, despite coinciding with a period of turbulence on global markets and a record slump in the value of the Dow.
Commenting on the decision to list in Bucharest, Vasile Tofan, a partner at Purcari’s private equity backer Horizon Capital, says it was “a great fit”. Following the IPOs of healthcare provider Medlife, Digi Communications, and fast food franchisee Sphera in 2016 and 2017, “the momentum was there, there was a lot of excitement among institutional investors about the Romanian growth story, and given our strong presence in Romania I think the fit was evident”.
The February 15 IPO followed a period of rapid expansion. The company reported revenue growth at a compound annual growth rate (CAGR) of 34% between 2014-2016, led by Romania, where average growth was 55%, followed by Poland (49%), Moldova (44%), and the Czech Republic and Slovakia (15%). This continued in the first nine months of 2017, when sales grew by 35% y/y, including a robust 69% in Romania.
Purcari was forced to accelerate its expansion in these markets following the Russian embargo on Moldovan wine imports imposed back in 2013. Russia was once a very important market, not just for Purcari but for all Moldova’s major wine producers, which was why the embargo placed on Moldovan wine as the country took steps towards EU integration was such a blow for the industry.
Purcari is not alone in re-orientating its business westwards in the last few years. At the time of the embargo — which was swiftly followed by currency devaluations in the other important Eastern markets of Belarus, Kazakhstan and Ukraine — Purcari already had operations in Romania, which made the country a natural focus going forward.
“I don’t want to understate the challenges we faced along the way; Russia accounted for a very large share of our sales,” says Tofan. “[The shift towards CEE] had to happen quite fast. We had a couple of quite challenging years but I think we’ve done a tremendous job — our ebitda more than quadrupled since the embargo and our sales more than doubled.”
Purcari’s share of the market is still relatively small. It has a 7% market share in Romania, though this rises to 26% in the premium segment. As it looks to expand further post-IPO, the company plans to keep its focus on Romania, where its business has been boosted by the rapid acceleration in economic growth – Romania’s GDP grew by a stunning 7% in 2017, according to a recent flash estimate – and the even stronger consumer boom. “Our strategy is to pick our battles and clearly the no.1 battle is Romania,” Tofan says. “The second is to extend the successful Romanian formula to other regional markets.”
First among these is Poland, which according to Tofan has a “large, fragmented and still developing” wine market with mid single-digit growth. “We don’t want to reinvent the wheel, we just want to repeat the Romanian recipe,” he explains, in a country that is somewhat larger than in terms of population and much larger in terms of the size of the economy.
The third phase will be expansion in other CEE countries — the Czech Republic, Slovakia, the Baltic states and Ukraine — where Purcari already has a strong presence. “We are humble enough to focus mostly on CEE as opposed to trying to conquer the world. If you are small you have to be focussed,” comments Tofan.
Horizon remains invested in Purcani with a 22.7% stake, even though the IPO provided a partial exit, allowing it to sell 40.9% of the company, on which it made a 3.2 times gross cash-on-cash return.
In contrast to the organic growth that has characterised the last few years, there are plans to pursue acquisitions across the region. This is not new territory for Purcari’s management, as at the time Horizon made its investment in 2010 Purcari had recently completed five successful M&A deals. “The management had credibility and a track record of identifying, acquiring and integrating other businesses,” says Tofan. “Now we are again very actively looking at potential bolt-on opportunities, we are certainly hungry.”
In particular, the company’s management and investors are actively looking at potential deals in the Romanian market, which has benefitted from inflows of European structural funds, but where many of the new operators are run more like hobbies or side businesses. “We are seeing a fair number of assets with high potential that we believe would have more value in our hands than under the current owners,” says Tofan.
“As the company grows, and we do have very ambitious growth targets, we may consider a dual listing in the future, but for now we will focus on growing first, we will think about listing later,” he adds, though says it would be premature to speculate about where a second listing might take place.
A new generation of wine drinkers
Crunching the available data, it’s possible to paint a very positive picture of Purcari’s prospects. The CEE market is attractive because of its large catch-up potential, given the ongoing shift from beer and spirits to wine drinking, especially among the millennial generation. Today, for example, 25 litres of wine per capita is consumed in Germany (which is primarily a beer-drinking country) each year, compared to the very modest 6 litres in Poland and 4 litres in Ukraine, but this is gradually changing.
The increase in demand in the region is accompanied by a fall in global supply. Tofan points out that from an oversupply in the last few decades, mainly due to generous EU subsidies for winemakers, there is now a shortage of wine. Indeed, data compiled by the International Organisation of Wine and Vine (OIV) shows that 2017 was the worst year for winemakers for half a century.
Production last year is estimated to have plummeted by 8% y/y to 246.7mn hectolitres, mainly on the back of droughts in top producing countries Italy and France. By contrast, Romania emerged as one of Eastern Europe’s top wine producers, with output up a stunning 64%, while Moldova was on track for a 20% hike in production.
“It is truly a great time to be in the wine business: global supply is unable to meet rising consumption, leading to shortages and higher margins for producers,” Purcari CEO Victor Bostan told a press conference in Bucharest on February 15. “We look forward to capitalising on these favourable conditions, leveraging our low-cost position and strong brands.”
Still, there are potential obstacles ahead, not least the need to convince drinkers to buy wines from relatively obscure Moldova and Romania. This hasn’t always been the case — Moldova has a tradition of viticulture that goes back millennia, and a century or more ago Purcari wines were served to European royalty from Britain’s Queen Victoria to Russian Emperor Nicholas II. But the chaos of the early transition years led to a slump in production and quality in Moldova, along with other post-Communist countries, and in most cases it wasn’t until the early 2000s that new investments started to be made to revive quality.
The new wave of investment in Purcari got underway after Bostan founded his Bostavan Wineries Group in 2002. The following year, 250 hectares of vineyards were replanted at Purcari, a winery that dates back to 1827 when the Emperor of Russia issued a special decree granting it the status of the first specialised winery in what was then Bessarabia. More investments followed, including into new vintages: Alb de Purcari in 2010 and Icewine, made from frozen Muscat Ottonel and Traminer grapes, two years later. Today the group has more than 1,000 hectares of vineyards and four production centres in Moldova and Romania.
Looking to the future, Tofan believes Romania and Moldova have the potential to follow in the footsteps of the wines of first California and later New World producers such as Argentina and Chile. “We have seen this movie before,” he tells bne IntelliNews “I think there is still a lot of unmet potential in terms of perception of Romanian and Moldovan wines. They are still rather anonymous.” In the same way that New World wines, once seen as low quality and unsophisticated, are now highly sought after, “I think history will be repeating itself”.
Purcari CEO Victor Bostan