Банкеръ Weekly



Bulgartabac Holding, one of Bulgaria's last state-owned behemoths, is offered for privatisation again. Unlike the attempts made so far, this time the sale may be successful. What is more, there may not be another scandal. Whether or not there will be candidates to acquire a company which will be thrown ruthlessly in the deep water of competition by next September or October is another story. This is the time when fixed cigarette prices will probably be cancelled and a registration regime will be adopted. From then on, each producer will be allowed to set a price to the cigarettes produced and imported in the country. A later blow on Bulgartabac Holding will come from the cancellation of protective import duties on tobacco products made in the European Union, if the country's EU integration meets the current schedule. This, too, will result in a considerable fall in the prices of imported cigarettes.
Anyway, interest in Bulgartabac Holding and the companies in its system remains strong. In Bulgaria, almost half of the population - about 3 million people - are active smokers. The holding controls about 90% of this market and the remaining part is distributed among foreign brands sold here legally and smuggling import. The average number of cigarettes each Bulgarian smokes a day is 10 which means that over 3 million smokers swallow 547 million boxes of cigarettes a year. Based on this rough calculation, the Bulgarian cigarette market is estimated at about BGN1BN.
Before Bulgartabac Holding is privatised, it has to be restructured. All tobacco processing companies and the packing plant, Plovdiv Yuri Gagarin-BT, are expected to be sold by year-end. A stake of 80.57% of the Plovdiv-based company will be offered for sale on the stock exchange first. At present, the privatisation through the Bulgarian Stock Exchange - Sofia is considered the best alternative because it guarantees the maximum financial effect. There are no procedural and technical obstacles that would restrict the access of potential investors to the assets of this company and this fact is supposed to result in a growing number of interested people. Because of the short terms in which the public offering will be fulfilled, corruption in the course of the sale seems unlikely.
Nevertheless, the sale of shares of the packing plant on the stock exchange has some disadvantages compared to the competition procedure. In this type of sale the new owner will not be obliged to meet investment or social requirements. At the same time, the company keeps its dominating position of a single producer of filters and boxes which enables the new owner of the plant, being a private market subject, to offer prices of cigarette packing and filters that are not always motivated by the market.
Tobacco processors will be sold through the stock exchange, through competition or will be declared in liquidation.
According to well informed sources, interest in the processing companies will be demonstrated mainly by Bulgarian companies which hope to become suppliers of processed tobacco to companies within the system of Bulgartac Holding. However, foreign buyers from the region may appear, too. They may be attracted by the cheap working force in the country and may supply raw material both to Bulgarian cigarettes plants and those in the neighbour countries. The sale or the possible declaration in liquidation of the processing companies is expected to finish by year-end.
Consortium Subev Co, teamed up with Euro-finance and Balkan Consultant Company was picked to be consultant of the sale procedure of Bulgaria's tobacco monopoly Bulgartabac. Three consortia submitted bids for consulting the sale procedure of Bulgaria's tobacco monopoly Bulgartabac. The bidders were tie-ins between First financial broker house and Legacom, Kamburov, Transacta and Bulbrokers and Subev Co, teamed up with Euro-finance and Balkan Consultant Company.
It's still difficult to say how much money will enter the holding and how many enterprises will be deleted from the commercial registers. That will depend on the strategy of the consultant - a consortium between the lawyer's' firm Subev Co, Euro-finance AD and Balkan Consultant Company OOD, and on the interest of investors.
Only the most appetizing companies - the cigarette factories in Blagoevgrad, Sofia, Plovdiv and Stara Zagora - will remain after the sale of the first group of enterprises within the holding's structure. It's curious who will buy what from them as most of the multinationals have already acquired plants in the Balkan region. British American Tobacco, for instance, which was a candidate-buyer for the Bulgarian holding during the last privatisation procedure in 2004, already owns factories in Serbia, the Czech Republic, Romania and Turkey. And Reetsma has an enterprise in Macedonia. If any of these companies shows interest again it might well be motivated by the desire to eliminate competition in Bulgaria by closing down the enterprises.
The only international company which has not acquired an enterprise in the region yet is Gallaher Group Plc, owner of Austria Tobacco as well. Its eventual interest towards the Bulgarian cigarette plants would be logical as the company could settle solidly in the Balkans by acquiring Bulgartabac Holding. According go some sources, however, the company has not showed a sign of interest in the holding's privatisation so far. Mainly regional and financial investors are interested in the Bulgarian cigarette industry. That means that an eventual sale of the holding will be followed by its resale with the aim of making a profit.
The strategy for the divestment of Bulgartabac Holding will be probably ready in end-August or early-September. It is still not clear what option for privatisation will be chosen. But if the sale of the companies within the holding on the stock exchange yields good results, the same scheme might well be applied to the restructuring of the parent company too. Thus, the rulers will certainly give an impetus to the development of the domestic capital market and will at the same time avoid long court procedures which accompany almost all divestment deals in this country.

Bulgartabac Holding AD reported a consolidated net profit of BGN54,000 for the first quarter of 2006, down from BGN6.315MN for the same period of last year. Net sales proceeds dropped 22% to BGN64.49MN, down from BGN82.833MN in 2005, and proceeds from sales of output went down 32% to BGN51.7MN. Expenses for economic components decreased to BGN61.918MN (down from BGN70.995MN for 2005 Q1). Financial expenses declined to BGN2.185MN vs BGN2.891MN a year earlier, with expenses for interest payments going up from BGN696,000 to BGN860,000. The company's liabilities totalled BGN232.3MN in end-March 2006, with tax liabilities exceeding BGN93MN, bank loans debts standing at almost BGN46MN, and liabilities to clients and suppliers - at BGN25.5MN. As of March 31, 2006 Bulgartabac Holding's share capital amounted to BGN7.367MN, and its equity - to BGN366.662MN.

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