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May 14, 2015 Eastern Europe and the Caucasus Global brewers flourish in Belarus
bne IntelliNews Daily 7
Bank of Georgia
to spin off private healthcare business
bne IntelliNews
The Georgian central bank’s decision to tighten regulations and force banks to ditch non-financial assets will force Bank of Georgia to spin off its flourishing health- care business before the end of this year.
“Bank of Georgia Holding intends to IPO the healthcare business, Georgia Health- care Group (GHG), through a planned stock market listing in London. We are targeting an IPO in 2015,” Bank of Georgia’s chief executive, Irakli Gilauri, confirmed to bne IntelliNews.
London is a market that Bank of Georgia knows well, as the bank has been traded on the London Stock Exchange since 2012.
The IPO, which includes healthcare ser- vices and health insurance, is likely to prove popular with investors. The busi- ness reported a GEL13.2mn ($7.5mn) profit in the first nine months of 2014, up from GEL11.3mn ($6.4mn) during the same pe- riod in 2013. The floatation will also play to a region-wide trend of expanding private health services that appeal to the emerging middle classes looking for better quality services for their families.
Bank of Georgia’s holding company has been buying up healthcare facilities, mostly in the capital of Tbilisi, and currently owns some 38 hospitals and clinics with over 2,000 beds, which accounts for just under a quarter of the private healthcare business in the country.
“The event itself [the IPO] is more im- portant than the actual valuation as a key re-rating catalyst for the [Bank of Georgia] stock,” says Renaissance Capital’s head of financial sector research, David Nangle, confirming his ‘Buy’ rating on the bank's stock.
Although the healthcare business has proven to be a good investment, the central bank is not keen on commercial banks in- vesting in non-core businesses irrespective of how profitable they prove to be. In Oc- tober the National Bank of Georgia (NBG) ordered banks to ditch their ancillary busi- nesses by the end of 2015, creating an at- tractive opportunity for investors.
“This practice creates a conflict of in- terests,” the NBG noted, adding that the central bank welcomes shareholders and owners of commercial banks investing in non-banking services, but only if carried out separately from the bank.
The share of non-financial assets as a proportion of banking sector assets re- mains relatively small, according to ana- lysts, though the NBG decided to nip a po- tential problem in the bud by toughening restrictions. During boom times, banks have a tendency to build up exposure to the most profitable sectors (typically real estate investments), which recent history has taught usually ends in tears when the inevitable downturn arrives.
The NBG has been tolerant of non-core investments in the last few years as the banks struggled to make ends meet fol- lowing the 2008 crisis. But now the sector is back on its feet, it deems the time for prudence over profits has arrived.
Sergei Kuznetsov in Minsk
Global beer groups Carlsberg, Heineken and Olvi are flourishing in the Belarusian market after taking over local breweries in the last decade. The trio are putting in solid financial returns and have stolen a march on their local rivals, which are now paying dearly for the state's failure to privatise the local companies.
The state-controlled brewer Krinitsa is the biggest beer producer in Belarus. The company brewed a third (31.8%) of all the beer in Belarus in 2014. However, de- spite its potential the brewer has suffered heavy losses in recent years and relies on financial support from the government. “At present, the company is one of the lead- ers of the Belarusian economy in terms of losses,” Oleg Andreyev, managing director of investment banking at Minsk-based En- terInvest, tells bne IntelliNews.
In April 2014, the brewer’s situation came under the steely eye of Belarusian President Alexander Lukashenko, who commented: “Only 55% of Krinitsa’s ca- pacity is being used... A great amount of money has been injected into the compa- ny's production and only half of it is in op- eration. And now the company is asking for money to pay off its loans.”
Despite this telling-off, the company’s predicament has not significantly improved since; just 63.6% of the brewer’s production capacity was in use in 2014. This stands in stark contrast to three foreign-controlled beer makers – Alivaria (owned by the Carls- berg Group), Lidskoe Pivo (owned by Olvi) and Heineken in Belarus – which have pro- duced significantly better results in terms of capacity utilisation.
Beer has been a bellwether in transition countries, as it is usually one of the sectors to be privatised that results in an explosion of sales and profits on the back of dramat- ically improved quality. Krinitsa missed its chance when the authorities baulked at selling the company off to foreign inves- tors several years ago. The government handed Krinitsa over to Priorbank, Raif- feisen Bank International’s subsidiary in
Belarus, in 2003 on a five-year trust basis, explains Andreyev, to try and attract inves- tors. The company built up a 50% market share by 2007-2008 and many international companies, such as Oasis Group and Efes Beverage Group, had a real interest in tak- ing it over. “Success was close enough,” Andreyev says.
However, the government got cold feet and cancelled the sale. Andreyev says the unwillingness to privatise has always seemed paradoxical. “There is a feeling that Krinitsa had a patron [inside the gov- ernment] who put aside the asset ‘for themselves’.”
Too much froth
Brestskoe Pivo, situated in the eponymous region on the border with Poland and 90% owned by the state, is also experiencing chronic problems. The brewer’s capacity
conditions, in particular a requirement to invest at least $10mn in the first 12 months after the sale, as well as repaying its debts to the state. The new owner would also not be allowed to sack any workers for three years, and their salaries should remain on a par with the regional average.
Daniel Krutzinna, managing partner with Civitta consulting company, notes that Obolon, Ukraine’s largest beer maker, and Detroit Investments, a Cyprus-registered beer and beverages producer, were once interested but probably won’t bid this time round. “The brewer should have been sold long ago, when it was in better financial shape and when greater demand existed,” Krutzinna tells bne IntelliNews.
And this is not a great time to be sell- ing breweries. The regional crisis has led the Russian beer market, by far the big- gest in the region, to fall by 30% between
“The brewer should have been sold long ago”
usage is the lowest among the country’s brewers, at just 42.3% in 2014, and in No- vember it was declared bankrupt by a Be- larusian court.
Like Krinitsa, the authorities’ negotia- tions with potential buyers came to nothing because a price could not be agreed and the state loaded the company with such heavy social obligations the project would have been "completely unprofitable and ineffi- cient”, says Andreyev.
The regional authorities are due to make a last ditch attempt to offload the brewery on May 5, with an initial asking price of BYR163.6bn (€10.3mn). However, the au- thorities were in danger of repeating past mistakes, by imposing extremely tough
2008 and 2014, according to the Russian brewer Baltika. All three of the leading for- eign-owned beer groups have lost exports as a result. At the same time the cheaper ruble has made Belarusian beer even less competitive.
In the meantime, Belarusians continue to favour spirits over beer: Belarus has one of the lowest rates of annual beer consumption in Europe – about 50 litres per head, compared with the continental leader, the Czech Republic’s 143 litres. “Seven years ago we were distressed be- cause Belarusians consumed too much strong spirits... Strong alcoholic spirits are still popular, while demand for beer is the same,” Lukashenko said last year.