Croatian conglomerate Agrokor will need to divest foods businesses to fuel retail expansion
- September 19, 2008
||disclosure of bidders by banking sources, September 2008
||Talosto (Russia), leading domestic frozen foods producer with 12% market share in ice-cream
||bidders include Agrokor d.d. (Croatia), largest domestic food, beverages and retail group
||Andrei Abrosimov, general director of Talosto, plus minorities
||market entry into Russian ice-cream business, part of regional expansion strategy
||attractive valuation, timing
||Agrokor is also on the shortlist to acquire 90% stake in Russia retailer Lenta, valued at $ 2 bln
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, itâs doubled in turnover in the last three years, largely thanks to acquisitions of which itâs made 15 in the last decade. However, with its appetite for ever âbigger retail acquisitions, in adjacent countries as well as Turkey and now Russia, plus a stretched balance sheet, we believe thereâs growing pressure for the group to make key foods divestments, with its regional mineral water, ice-cream and margarine businesses being the most âlow âhangingâ.
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 Croatiaâs 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, itâs become market leader in retail, margarine, ice-cream and mineral water in neighbouring Bosnia & Herzegovina. Itâs 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 Serbiaâs retail sector (Idea chain). On top of that, it has significant positions in Hungaryâs ice-cream and mineral water markets. In total, 20% of Agrokorâs revenues are now derived from foreign markets.
Aggressive expansion is reflected in Agrokorâs 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 Agrokorâs balance sheet. In spite of a posted 50% increase in EBITDA in 2007, the groupâs 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).
Thatâs 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 doesnât look like Agrokorâs 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 âbigger acquisitions.
This potential deal with Russiaâs 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. Itâs 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 âgrowing 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).