Банкеръ Weekly

Briefs

SMOKE AND FIRE AROUND BULGARTABAC PRIVATISATION

Sergey Romanovich Shelehov is the President of the Russian Association of the Distributors of Tobacco Products (Grandtabac) in which both Bulgartabac and British American Tobacco are members. One of Grandtabac's main goals is to protect the legal market in Russia, the legal production, and the legal brands. A cooperation agreement has been existing between Grandtabac and Bulgartabac for more than two years. It stipulates that the Bulgarian side authorize the association to solve any problem related to the sale of Bulgarian cigarettes on the Russian market. An agreement does exist, but only on paper.Mr. Romanovich, are you aware of how Bulgartabac sale is going?- I've been watching the process very carefully. In my opinion, a few major mistakes were made in the course of the privatisation of the holding and the tactics adopted is one of them. The value of the stakes, the valuation, etc. were not clear again... The participation terms were not so transparent and the presence of just one potential buyer, British American Tobacco, proved that. Are Russian companies still interested in the Bulgarian tobacco holding?- Unfortunately, Russian companies declare less interest in taking part in that deal compared to previous years. I do not know one that would get involved in the privatisation under the terms of the latest procedure. For example, the applicants were required to have a EUR500MN turnover. How many companies are there in the world that could qualify? This makes the average investor unwilling to take part in the competition.However, the Bulgarian Government declared that it wanted a strategic investor...- Being a strategic investor does not mean having free financial resources. As far as I see, a strategic investor is the one who comes for a long period of time and starts to develop the tobacco branch while taking its interests into account.Why didn't the agreement signed by Grandtabac and Bulgartabac have effect?- This agreement is more than two years old. It stipulates that we are obliged to defend the interests of the Bulgarian holding on the Russian market. But for the present the document is only partially being implemented because of the conditions set by the Bulgarian side with regard to the privatisation process. That's why we are displeased that the deal failed again.What concrete steps did you make?- Although it may not be noticed at first sight, we maintain at least minimum presence of the Bulgarian cigarettes in Russia. Today their share is approximately 0.8-1 per cent. We maintain it by ourselves. Despite the modest amounts, we do not allow anyone to produce these brands, offer them on the Russian market and tarnish Bulgartabac's reputation. Which is not insignificant, considering the present situation.You mean that only legal production is included in this percentage?- Yes, only legal production. In Russia there are some small companies with suspicious origin that are permanently interested in Bulgarian cigarettes but have not reached an exclusive agreement with the big Bulgarian companies to produce them. They do not have their own retail networks and operate in the grey sector, whereas Bulgartabac Holding and its managers need to solve more serious problems. However, considering the 1% presence of Bulgarian cigarettes here any amount of illegal production of Bulgarian brands appears a hard blow.A part of Bulgartabac brands were acquired and registered by private individuals here in Russia...- Yes, a great number of Bulgarian cigarette brands traditional for Russia were acquired by individuals. Whether or not this is legal should be established by the respective authorities. I have seen a number of such documents certified by the Russian Patent Department stating that a given brand has a new owner already. Then, apart from gaining control over the production, that owner is allowed to change the inscriptions on the packing. These brands are produced in Russia but Bulgartabac has lost the most important thing - the inscription on each box Produced under the control of Bulgartabac or The brand is owned by Bulgartabac. Now the old and familiar packing appears without the name of the owner. Unfortunately, Bulgartabac is taking a strange loyal stand which on a fast growing market is quite dangerous for it. Perhaps it is not worth being so diplomatic all the time. In practice, it means that the brand still exists for Russia but for Bulgartabac it has been lost. If the agreement that we signed starts operating, we are obliged to help Bulgartabac Holding to receive fees for the amount of Bulgarian cigarettes produced in our country. Is there any Bulgarian tobacco in the so called Bulgarian cigarettes?- It all depends on the producer. You know that only one of all established cigarette making joint-ventures keeps operating on the territory of Russia. But its licence agreement is expiring, too...You mean the company situated in Podolsk.- Yes. And one more thing - while getting a licence from Bulgartabac to produce Bulgarian cigarettes in Russia is so difficult, the new private owners of Bulgarian brands offer a chance to sign these agreements easily and not so legal production keeps flooding the market. Tobacco which is more profitable if found here is put in these cigarettes. Without a licence agreement signed with Bulgartabac there is little chance that Bulgarian tobacco is used in the cigarettes. Also, we should not forget that huge amounts of Moldovian, Kyrgyzian, Indian, Chinese tobacco enters Russia duty-free today. It is kept in warehouses and is definitely cheaper than the Bulgarian one. That is why people interested in making money fast and not in helping Bulgarian production grow buy decent amounts of tobacco at minimum prices.Of the fifteen Bulgarian cigarette brands registered here, thirteen have new owners already. In the best case, Bulgartabac now possesses one or two. By selling its brands to private entrepreneurs the holding is losing huge amounts of money. I mean under the ROYALTY licence agreement. It stipulates that the Russian side is obliged to buy Bulgarian tobacco and put 100% of it in Bulgarian cigarette brands. It means about 300 tons per month or nearly 5 tons per year for each brand. Respectively, that means USD10MN per production cycle including the licence agreement, the supporting materials, tobacco and all the rest needed for the production. If we multiply this money by the three years missed, here we have quite a curious amount.Do you see a way out of this situation?- Bulgartabac Holding should undertake more decisive steps. Now everything is in the hands of its Supervisory Board. As far as I know there is a new MInister of Economy in Bulgaria. If he assigns to the Supervisory Board to act as in the conditions of announced privatisation there will be no new decision. But if the fulfilment of the existing licence contract goes back to Bulgartabac's priorities things could quickly change until a new divestment procedure is invited. We proposed that before the last attempt for the holding's sale. Grandtabac was ready to guarantee payment to the producer which makes real Bulgarian cigarettes in Russia. That makes about USD15-20MN for two years, even when Bulgarian cigarettes account for only 1% of the market here. But until the licence contract is not put into effect there will be still ideal conditions for illegal production of Bulgarian cigarettes and Bulgartabac will be losing money from that. Even if the case is taken to court, under our bureaucratic judicial system, under Russian legislation nobody can stop that production until a final ruling is extended. Do you mean to say that even if Bulgartabac lays claims it will have to wait too long?- That's right. Taking into consideration the Russian specifics and the fact that Bulgartabac is based in Sofia, it will never win a lawsuit in a Russian court. But Bulgartabac has a representative in Russia who should protect its interests. There is the Grandtabac association, whose member Bulgartabac is, and this association is obliged to protect the holding's interests. There is hardly a company in Russia that will be willing to sue Grandtabac, that is useless. And our association has adequate mechanisms for protecting legal production. It will be sufficient to close down certain distribution networks, and traders to give up selling illegally produced cigarettes. These methods are much more efficient that court rulings. If sales stop illegal production will become meaningless.

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