All change in the Balkans as Agrokor snares Mercator

17 June 2013

Miloš Ryba Research Director

Agrokor has signed a Sale & Purchase Agreement with a consortium of 12 selling shareholders for 53.1% of the share capital of Poslovni Sistem Mercator (Mercator). Agrokor’s cash offer of EUR120 (USD156) per share values the stake at EUR240 million (USD311 million). This represents EUR452 million (USD587 million) for a 100% stake, the company said in a press release.

Agrokor’s Konzum has become the largest retailer in the former Yugoslavia.

The acquisition of Slovenian grocer Mercator has – overnight - made Agrokor’s Konzum retail business the largest retail chain in the ex-Yugoslavian region, with an estimated turnover of EUR6 billion (USD7.8 billion) in 2013. Croatia-based Agrokor, which holds a dominant position in its home market, has now secured access to new markets in Slovenia and Montenegro and, at a stroke, taken the top spot in both.

Thanks to the purchase, Agrokor has closed the gap on market leader Delhaize Group in Serbia and become the second-largest retailer, while it has reinforced its existing leadership in Bosnia & Herzegovina. Looking at the Balkans as a whole, Agrokor has now become - with its EUR6 billion (USD7.8 billion) forecasted revenue - the region’s second-largest retailer after Schwarz Group - predicted revenues of EUR6.6 billion (USD8.6 billion) - in 2013. Delhaize Group, with expected revenues of EUR4.1 billion (USD5.3 billion), will become the third-largest retailer in the Balkans.

Implications
  • Agrokor will gain massive purchasing power in Slovenia, Croatia and Bosnia & Herzegovina. It will renegotiate contracts with its suppliers, while some Mercator suppliers may well be excluded from negotiations and face considerable problems, even bankruptcy.
  • Schwarz Group’s Lidl in Slovenia and Croatia, Delhaize Group in Serbia and SPAR (Austria) in Slovenia are likely to gain some of Mercator’s shoppers as Agrokor could struggle to firm up business synergies.
  • Agrokor could be acquired by a strong global player like Delhaize Group or Tesco in the medium term.
A massive challenge for Agrokor

Agrokor has no previous experience with mergers and acquisitions in the retail sector. As a result, perfecting synergies between Mercator’s and Agrokor’s businesses like logistics, IT and procurement, including private label sourcing, could prove a big challenge for the retailer. In addition, Croatia is due to join the European Union on 1 July 2013, something which may have a major impact on Konzum’s operations, not to mention on Agrokor’s subsidiaries and suppliers in non-EU countries like Serbia and Bosnia & Herzegovina.

It will be extremely important to accomplish the takeover smoothly and in a timely manner as any prolonged synergising process could lead to out-of-stocks in Konzum outlets. This would play into the hands of competitors like Schwarz Group and Aldi in Croatia and Slovenia, as well as Delhaize Group in Serbia – all of which would likely absorb some disappointed Mercator shoppers during such a hiatus.

Consolidation of Agrokor’s businesses will cause insecurity among manufacturers in the region as it is likely to replace some Mercator suppliers with its own subsidiaries. This is unlikely to happen in the short term, as it will take time for Agrokor’s suppliers to adjust their production capacity and for Konzum to synchronise its procurement and private label product development with Mercator’s.

However, unlike in Poland, where the retail sector is still fragmented and the major acquisition of Emperia Holding by Eurocash in 2012 did not cause any significant existence problems to Emperia Holding’s suppliers, the retail market in Slovenia and Croatia is consolidated and so some of Mercator’s suppliers will find it difficult of offset lost shelf space at Konzum’s stores. As I expect that Schwarz Group’s Lidl, as well as Delhaize Group banners, will take a certain percentage of Mercator shoppers, these businesses may well require extra supply production capacity. This could be fulfilled by some of the delisted Mercator manufacturers. Nevertheless, it cannot be excluded that some of Mercator’s suppliers will have to close down their businesses.

Mercator's troubles passed on to Konzum

Business consolidation aside, Konzum has inherited several pain points Mercator failed to address in the last two years and which led to a consolidated loss of EUR103.6 million (USD133.1 million) in 2012. With negative revenue growth reported since 2010, Mercator has been losing market share in its core market of Slovenia, where around 70% of its total group revenue was generated. Revenue also fell in Serbia, its third-largest market, in 2012. Expansion of private label products in Bosnia & Herzegovina and Montenegro fell flat and the retailer had to withdraw some product lines.

Mercator’s private label manufacturers may suffer as Agrokor establishes synergies between its established and newly acquired operations.

Non-food formats like fashion stores Modiana and consumer electronics e-commerce operation M Tehnika are simply not profitable. The former reported a loss of EUR8.1 million (USD10.4 million) in 2012, while the latter ended up with a loss of EUR11 million (USD14 million) last year. It is likely that Agrokor will divest from those unprofitable operations as they do not fit with its food based multi-format store portfolio. Indeed, such a move would help it integrate Mercator’s business to its portfolio faster.

Slovenian retail market will be reshaped

The greatest challenge for Agrokor will be to hold on to its shoppers in Slovenia. Mercator held dominant market position here and its takeover by a Croatian company excited strong opposition, not only from consumers, but also in that it has become a political matter. It seems highly likely that Agrokor will be unable to overturn the negative growth in Slovenia inside the next two years.

This, combined with a hostile attitude from local shoppers towards the new foreign owners, will mean its market share will fall, and keep falling. As a consequence, the Slovenian retail market will eventually be reshaped, with SPAR (Austria), Aldi and Schwarz Group gaining market share and closing the gap on Agrokor.

Agrokor’s Konzum itself a potential M&A target

As prior development in the emerging markets has demonstrated, Agrokor’s shareholders could easily sell the entire retail business in the future. Following in the footsteps of Poland’s Emperia Holding and Serbia’s Delta Holding, Agrokor shareholders could cash in on sales of the company’s retail arm to a foreign retail chain in the future.

Indeed, shareholders of Delta Holding’s Delta M sold their business for an excellent price of EUR933 million (USD1.31 billion), allowing Belgium’s Delhaize Group to establish a foothold across the entire Balkan region. Agrokor’s prime position in Slovenia, Croatia and Bosnia & Herzegovina would be a tempting proposition for foreign retailers already operating in the region like Delhaize Group itself.

Source: Planet Retail