August 31, 2018 / 11:57 AM / 2 months ago

Croatia's Agrokor gets back to business after credit deal

PRAGUE/ZAGREB (Reuters) - A deal with creditors has finally given Agrokor boss Fabris Perusko time to focus on leading the Croatian food group back from the brink of bankruptcy and fighting off international competition.

FILE PHOTO: A Konzum logo is seen on the Konzum supermarket in Zagreb, May 11, 2017. REUTERS/Antonio Bronic/File Photo

The former McKinsey & Company consultant was promoted in February from the board of Tisak, a chain of newsagents owned by Agrokor, to restructure the parent company. But the Croatian was promptly distracted by months of difficult talks with creditors.

With a deal agreed on July 4, he can start preparing southeastern Europe’s biggest company for a stock market listing within four years, work on regaining access to financing and revitalising its Konzum supermarket chain.

Success is crucial for the Balkans where Agrokor employs some 52,000 workers. Revenues amount to 15 percent of Croatia’s economic output and its troubles sent shudders through several of the region’s economies.

Agrokor is a major part of ongoing efforts to integrate regional economies scarred by the wars of the 1990s but German rivals Lidl and Kaufland are making inroads.

“I thought I would spend part of my time on restructuring,” Perusko told Reuters earlier this month. “But unfortunately with the level of disagreement among creditors and the aggressive timetable we didn’t have much time for it. Now we can focus.”

Agrokor, founded as a flower shop in 1976, ran up debts of some 58 billion kuna (7.01 billion pounds) as it snapped up companies and brands across the former Yugoslavia.

Facing bankruptcy, it was put into state-run administration in April 2017, causing a crisis that toppled Croatia’s ruling coalition.

The current government, which passed a law to keep the company afloat, mandated it to reach a debt settlement with creditors, which include local and foreign bankers, bondholders and suppliers, by July 10.

Under the deal, Agrokor’s biggest single creditor, Russia’s Sberbank will become the largest shareholder with a 39.2 percent stake. Bondholders will own 25 percent, local Croatian banks 15.3 percent and Russia’s second largest bank VTB (VTBR.MM) will end up with a 7.5 percent stake.

A Croatian court is expected to confirm the settlement in October or November.

TOURISM, HEALTH SALES

Perusko declined to outline store closures or job cuts. Most analysts say these are critical to strengthening Konzum, the group’s biggest revenue driver.

He said a first step would be rebuilding credibility with suppliers and creditors. Agrokor sometimes took over a year to pay suppliers, which then compensated by raising prices.

Running the business more efficiently and getting better deals from suppliers will help Konzum fend off international rivals, he said.

Offloading non-core assets such as its tourism or health businesses to prepare for a potential initial public offering in coming years will also help, Perusko said. Agrokor’s creditors want the company to be listed within four years, he said.

Perusko said he currently had no plans to sell major assets such as ice-cream maker Ledo and bottle water company Jamnica although this could change.

DIFFICULT TASK

Analysts say his main task is squeezing more profits out of the string of 790 Konzum supermarkets that account for 45 percent of the group’s revenue and face stiff competition from international retailers.

Lidl and Kaufland have expanded during Agrokor’s recent troubles and analysts say they are hurting the Croatian retailer’s bottom line.

Zagreb-based analyst Damir Novotny said Konzum has a 12 percent head-count cost to revenue ratio while Lidl comes in at around 7 or 8 percent — savings that help rivals keep prices low.

“Konzum put a lot of efforts into large markets and shopping centres but consumers are moving to discounters like Lidl and Kaufland that offer products for cheaper,” Novotny said. “They lost one year doing nothing in terms of strategic restructuring but only looking at how to restructure the balance sheet.”

Agrokor’s Mercator brand — which includes 985 stores spread in Slovenia, Serbia, Bosnia and Herzegovina and Montenegro — also faces increased competition from international chains.

In Serbia, Lidl is set to open between 10 and 20 stores in 2018 and in March put out a call for more than 1,000 workers. In Croatia, Kaufland opened its 39th shop in April and Lidl its 95th in May.

Konzum also faces challenges from Studenac and Tommy stores on the lucrative Dalmatian coast where tourists flock to the blue waters and rugged beaches.

Asked about the competition, Perusko said: “Konzum and Mercator can be very solid retailers when we clean up the internal issues.”

Still, analysts say he has a difficult task ahead.

“The focus on the settlement didn’t permit enough discussion about how the business will compete in the long run,” said Luka Oreskovic, a partner at investment and advisory firm Spitzberg Partners.

“The new owners...need to allow the management to implement the necessary restructuring, including job cuts and closing down stores if they’re unprofitable. This will be harder now than it was a year ago.”

Additional reporting by Ivana Sekularac in Belgrade and Marja Novak in Ljubljana; Editing by Anna Willard

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