Page 12 - bne_Magazine_May_2017_print

12 I Companies & Markets bne May 2017
Unfortunately for Agrokor, the deal came shortly after Croa- tia’s EU accession, at a time when West European retail giants were investing in the Western Balkans as one of the final fron- tiers for retailers on the continent. Three years before Agrokor announced its acquisition of Mercator, Belgium’s Delhaize bought up Serbia’s Delta Maxi. Germany’s Schwartz group, mainly via Lidl, was also active in the region, further saturat- ing local markets and eroding the market share of Agrokor’s flagship retail chain Konzum as well as Mercator.
Spar is also set to become a more important player in Croatia, after announcing in 2016 it would acquire Austrian retailer Bil- la’s stores in the country. As of late 2016, Mercator was still the largest retailer in Croatia, but data from the competition agen- cy showed that Lidl and local player Plodine were catching up.
“Agrokor took over its largest Balkan rival, Mercator, after four unsuccessful attempts, driven by goals to scale up its business. However, now it is facing margin pressure due to aggressive local discounters like Spar,” says Amman Patel, analyst at global investment research and analytics firm Aranca. “The margin pressure and high commodity prices, although a sys- tematic issue, aggravate the problem for Agrokor due
to its high leverage.”
Patel points out that declining ebitda made Agrokor’s leverage “beyond manageable”, pushing its ratio of net debt to trailing 12-month ebitda to above seven, compared to a typical ratio of three for the retail industry.
Elsewhere in the Balkans, Delhaize is now the market leader
in Serbia, with a small edge over Mercator according to Euromonitor data, while there is speculation that Lidl, which registered a Serbian entity back in 2010, could finally enter
the market this year. In Bosnia, Mercator is now going head to head with local chain Bingo, which has benefited from funding from the European Bank for Reconstruction and Development.
Poslovni Sistem Mercator remains the market leader in Slove- nia, with a considerably larger market share than next placed Spar, although again it is facing increased competitive pres- sure. “Mercator’s share has fallen from 45% to 30% in Slovenia post integration and the company is facing delay in realising any efficiency gains as many of its stores are under renovation and being remodelled,” says Patel.
The crisis at Agrokor also has a geopolitical dimension, because of the involvement of two Russian state-owned banks, which are now its main creditors. This reportedly caused concerns in Zagreb, because of the leverage it could give the
Russian lenders in the EU and Nato member state, arousing speculation that there was a geopolitical motivation behind the Russian banks’ actions in Croatia.
In May 2016, Sberbank announced it had opened a six-year credit line worth €350mn for Agrokor, following a €600mn credit line provided in 2014. Later in the year, Agrokor said it had completed a refinancing exercise, which included the extension of €340mn of existing debt with VTB and a further €500mn with a syndicate of banks including Sberbank,
BNP Paribas, Credit Suisse, Goldman Sachs and J P Morgan Securities.
“Since Western banks, including the EBRD, reduced exposure and decided not to finance further expansion without restruc- turing and business model expansion, Mr Todoric approached Russian banks which offered refinancing under ‘softer’ condi- tions,” says Novotny. “That supported the illusion that Agrokor could continue rapid expansion without restructuring and a capital increase.”
However, this all came crashing down in the first few months of 2017, when bondholders started selling, prompted by concerns Agrokor would be unable to repay senior bonds due in May 2019. According to Bloomberg, the bonds backing the Mercator deal dropped from over 80 cents in the euro at the beginning of 2017 to just 20 cents as of March 23.
After weeks of speculation, creditors – including Sberbank, VTB, Central European lenders Raifferisen and Erste and local Privredna Banka Zagreb and Zagrebacka banka – announced a standstill agreement with Agrokor on March 31, which entered into force two days later. A wide-reaching restructuring of the group is expected in the two years before the €300mn worth of senior bonds are due to be repaid in May 2019.
Patel does not anticipate significant operational turnaround in the next two years, though he does expect some of Agro- kor’s assets to be sold off as restructuring gets underway.
“We expect to see asset sales in the next one to two years for deleveraging. Those could be top performers like Jamnica and Zwijeza, as less profitable ones might fetch lower valuations than what Agrokor might expect in a situation where they desperately need to sell,” he forecasts.
But Novotny warns that radical changes will be needed if the group is to survive in anything like its present form. “I strongly believe that Agrokor’s debt problems cannot be resolved without overwhelming strategic transformation, not only with small-scale business model changes,” he says.
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