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bne May 2017 Companies & Markets I 11
lems at the beginning of this year. The agreement, put in place on April 2, was reached after several months of speculation about Agrokor’s ability to repay its debts and reimburse sup- pliers, as the debt-financed expansion model that has served it well for decades suddenly imploded.
Although Agrokor has no debt maturing before September 2018, when €150mn of bank debt will become due, it must service the interest on its debt, including the coupons of its bonds, which are scheduled to be paid on May 1 for the €300mn notes maturing in 2019, and on August 1 for the €325mn and $300mn notes due in 2020.
Agrokor’s failure is a case study of how a regional empire built on expensive debt and crony networks was no match for the ruthlessly efficient West European retailers that targeted Croa- tia after its accession to the European Union in 2013.
“Debt-financed expansion, lack of strategic efficiency, miserable profitability, huge labour costs (more than 12% to turnover, much higher compared to competitors) as a result of [Agrokor’s] national champion mission in Croatia (and Slovenia), and long lasting economic recession (2008-2016), lack of transparency and proper corporate governance, all
of that led to balance sheet imbalances/financial leverage problems,” writes Damir Novotny, managing partner of managing consultancy T&MC Group, in a comment emailed to bne IntelliNews.
The crisis has ended the four-decade rule of founder Ivica Todoric, who had mainly used debt finance to grow his busi- ness from a small flower company founded back in 1976 – one of the many small enterprises allowed to operate when Croatia was part of the former Yugoslavia – into a regional empire spanning the food and retail sectors across the region.
Agrokor expanded through an aggressive acquisition strategy, chiefly in two waves of acquisitions in the mid 1990s and mid 2000s. The first wave took place in 1993 and 1994, after Croa- tia broke away from Yugoslavia, and while war was still raging in Bosnia. During this period Todoric snapped up cooking oil and margarine producer Zvijezda (1993), bottled water com- pany Jamnica (1994) and ice cream and frozen food manufac- turer Ledo (1994), all market leaders in their segments within newly independent Croatia.
Agrokor’s rapid expansion was reputedly helped by Todoric’s relationship with Croatia’s then President Franjo Tudjman and other members of the Croatian ruling elite. “Corporate strat- egy, as formulated by Mr Ivica Todoric personally, was more or less focused on a rapid inorganic growth strategy with heavy support by the Croatian elite,” writes Novotny.
The second buying spree took place a decade later, during a period of strong economic growth in the pre-crisis years of the mid-2000s. In 2005, Agrokor bought up Croatia’s largest agricultural company Belje, the country’s top meat producer PIK Vrbovec, and Agrolaguna, a producer of wine, olives and
beef. Two years later, it also bought a majority stake in the country’s biggest chain of news stands, as well as top tobacco retailer Tisak.
Since Agrokor doesn’t publish consolidated and audited financial reports, its debt instruments have been sold as junk, Novotny says. “For almost a decade the company financed expansion with mid- and long-term junk bond instruments, which led to enormous financing cost.” He also points to Agrokor’s expansion into non-core markets such as leisure, printing, advertising and civil engineering.
Dragan Munjiza, founder of Zagreb-based consultancy Jakov Viktor, notes that Agrokor has been “financing itself for 25 years with over-premium interest rates, unthinkable for its for- eign competitors Lidl-Schwarz and Spar Group”. In addition, “Agrokor had a lot of ‘pet side projects’, which have been occu- pying its limited resources, especially human and financial,” he tells bne IntelliNews.
Despite its rapid expansion and the size of its operation, Agrokor remains privately held, with Todoric still holding 95% of the group, and to a large extent it is still run like a private company. It is also a family concern; Todoric’s three children
– daughter Iva and sons Ante and Ivan – are all involved in the company, from the family’s base at the 16th century Kulmer Castle in Zagreb.
“Time is of the essence.
The situation is pretty acute”
While Todoric reportedly employed Rothschild in late 2014 to prepare for a potential IPO, so far only some of the group’s com- panies (such as Ledo) are listed on the Zagreb stock exchange.
The group’s most significant deal – and, according to analysts, one of the main contributors to its current troubles – was the purchase of Mercator, a Slovenia-based food and retail group. Along with Serbia’s Delta Group, Mercator had been Agro- kor’s main competitor in the region. The combined business had sales of €7bn at the time of the deal, and around 60,000 employees across the region.
Under the deal initially announced in 2013, Agrokor paid €240mn for a 53.1% stake in Mercator, raising its stake to over 80% the following year. In total the deal was worth €544mn, including the payment for Mercator, €200mn to restructure part of Mercator’s financial obligations, and €20mn to finance Mercator’s working capital.
But Agrokor failed to gain the expected benefits from Merca- tor, which even at that time was struggling financially and had to conclude a restructuring deal with its own creditors to allow the deal with Agrokor to go ahead.
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