Glenboden M & A Originations

Croatian conglomerate Agrokor will need to divest foods businesses to fuel retail expansion

Priority Rating priority rating 3
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Origination Status disclosure of bidders by banking sources, September 2008
Asset Talosto (Russia), leading domestic frozen foods producer with 12% market share in ice-cream
Buyer bidders include Agrokor d.d. (Croatia), largest domestic food, beverages and retail group
Seller Andrei Abrosimov, general director of Talosto, plus minorities
Buyer Rationale market entry into Russian ice-cream business, part of regional expansion strategy
Seller Rationale attractive valuation, timing
NBs Agrokor is also on the shortlist to acquire 90% stake in Russia retailer Lenta, valued at $ 2 bln
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Agrokor is one of the two big food conglomerates, alongside Podravka, that have survived intact the major upheavals that afflicted former Yugoslavia in the 1990s. Dominant in its categories in Croatia, it’s doubled in turnover in the last three years, largely thanks to acquisitions of which it’s made 15 in the last decade. However, with its appetite for ever –bigger retail acquisitions, in adjacent countries as well as Turkey and now Russia, plus a stretched balance sheet, we believe there’s growing pressure for the group to make key foods divestments, with its regional mineral water, ice-cream and margarine businesses being the most ‘low –hanging’.

Agrokor began life 30 years ago, as a private flowers business (a very safe and profitable sector in Communist times in CEE). Today, it has a portfolio of leading domestic brands in the mineral water, ice-cream and margarine categories, in which its market share ranges from 55% to 85%, as well as a dominant position in Croatia’s retail (Konzum chain), and meats businesses.

On top of this category diversity, Agrokor has made a major strategic push geographically, especially in the last five years.

In a short time, it’s become market leader in retail, margarine, ice-cream and mineral water in neighbouring Bosnia & Herzegovina. It’s also market leader in ice-cream in Serbia, with 40% share (Frikom brand), as well as a leading edible oils player in that country (Dijamant), and an investor in Serbia’s retail sector (Idea chain). On top of that, it has significant positions in Hungary’s ice-cream and mineral water markets. In total, 20% of Agrokor’s revenues are now derived from foreign markets.

Aggressive expansion is reflected in Agrokor’s financials. In the period 2004 -7, the group doubled its turnover, to reach HRK 20,7 bln, with top-line growth in 2007 alone reaching 35%. However, this growth has strained Agrokor’s balance sheet. In spite of a posted 50% increase in EBITDA in 2007, the group’s EBITDA margin is still only 7,5%. This weaknesses is reflected in an interest cover ratio of only x2,2 and financial gearing that reached 67% at the end 2007 (excluding minority interests).

That’s all in spite of the fact that, in 2006, the group underwent a major financial restructuring, ending in a big syndicated loan and the EBRD taking a 10% equity stake in the business.

It doesn’t look like Agrokor’s taming its expansion ambitions, to be better tailored to its financial means. The group continues to invest heavily, to enter new categories like fresh foods or soya spreads and, most seriously, to aim for ever –bigger acquisitions.

This potential deal with Russia’s Talosto, where Agrokor is competing with Unilever, is quite small. The bigger fish in the pipeline is the Lenta retail chain in Russia, for which Agrokor will need to pay upwards of $ 2 bln. It’s noteworthy, in this context, that at the beginning of 2008 Agrokor failed to come up with the $ 3 bln needed to acquire the Migros retail business, in Turkey, in spite of the backing of Blackstone private equity.

If Agrokor is serious about its retail ambitions, and these seem to be its priority, then it will need to divest some of its key food and beverage brands, in order to raise cash and reduce its funding pressures. This may be relatively easy, yielding high valuations, given the market leadership that the group enjoys, in categories that are attractive for M&A, in fast –growing Croatia plus its broader region.

Top of the list is surely its ice-cream business (Ledo brand, no.1 in Croatia and Bosnia, no.3 in Hungary; plus Frikom, no.1 in Serbia); Unilever and Nestle have both been active acquirors in that category in CEE recently.

Also mineral water (Jamnica and Kiseljak brands, leader in Croatia and Bosnia, significant in Hungary); in that category acquirors include Nestle and Danone.

Margarine might also be attractive, with candidates ranging from Unilever to Savola to Grupo SOS (Zvijezda brand leader in Croatia, Dijamant in Serbia).

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THIS LEAD'S VALUATION
Size (€ mln) 100
Sector ice-cream
Asset Quality Russia leader branded
Seller individuals
Buyer private corporate
P/S 1,5
P/Ebitda n/a
Type total consideration
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