Smoke and mirrors in Bulgaria's tobacco sell-off

By bne IntelliNews August 31, 2011

Branimir Kondov in Sofia -

The sole remaining bidder for 79.8% of Bulgarian tobacco group Bulgartabac Holding, BT Invest, is offering to pay €100.1m for the stake, but it remains unclear whether the Austrian-registered candidate linked to Russia's state-controlled banking group VTB will be the final owner.

In early August, Russian newspaper Vedomosti quoted an unnamed tobacco industry official as saying VTB might be buying Bulgartabac for a resale. "An interesting asset, the company has a leading position on the Bulgarian tobacco market," Vedomosti quoted the official as saying.

Bulgaria's Privatisation Agency, which is handling the sale, said on its website on August 29 that BT Invest has also pledged to buy yearly 5,000 tonnes of Bulgarian-grown tobacco in the next five years, a key condition in the tender which Bulgarian market sources and media have described as a politically motivated decision that has discouraged strategic buyers from bidding. The volume equals 13-15% of Bulgaria's annual tobacco output, according to different estimates. BT Invest also offered to invest a total of BGN7m (€3.6m) in the first two years after the purchase.

Pledges to purchase Bulgarian-grown tobacco carried the biggest weight of combined 60 points out of 100 total in the tender launched earlier this year. The purchase price came second in significance with 35 points, while investment commitments in the first two years after the purchase carried five points.

The utmost priority attached to guaranteed purchases of Bulgarian tobacco showed that political considerations were outweighing business criteria in the sale, Bulgarian weekly Capital commented on August 5, shortly after British American Tobacco, which had bought tender documents, withdrew from the race for "commercial and strategic reasons," as the Privatisation Agency put it in a statement. Austrian-registered CB Family Office Service, controlled by Capital Bank Grawe Gruppe, left the tender procedure even earlier.

Tobacco growing is the main source of income for many of the traditional supporters of predominantly ethnic Turk DPS party, which used to hold the balance of power in several Bulgarian coalition cabinets since the fall of Communism in 1989. DPS and the Socialists are in opposition to the current government of the centre-right GERB party, which aims to cut the fiscal deficit to close to 2% this year. If the sale goes through, it would contribute nearly half of the privatisation revenue of BGN450m that the government has planned for the current year and will give a considerable boost to its efforts to increase budget revenue. Privatisation proceeds totalled a meagre BGN6.6m through June, the Privatisation Agency said in its half-year report.

The requirement for the purchase of Bulgarian-grown tobacco for five years has worked in favour of DPS and its core electorate while keeping strategic investors away, Capital commented. Media speculation about the actual buyer behind BT Invest have ranged in recent months from a number of Bulgarian business people to a member of the Russian Duma to VTB itself, but nothing certain has emerged yet.

Now the tender commission and the sale advisor Citigroup Global Markers will examine BT Invest's offer before deciding whether to sell Bulgartabac.

Bulgartabac's shares closed 2.2% higher at BGN27.5 on the Bulgarian Stock Exchange on August 29, putting the company's market capitalisation at BGN198m (€101m). Bulgartabac turned to a net profit of BGN34.1m in the first half of 2011 from a loss of BGN577,000 in the same period a year earlier, the company's half-year non-consolidated interim report showed.

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