By Andrey Medvedev
It seems that the interminable saga of Bulgartabac that has been going on for the past 13 years has finally reached a definitive but somewhat mystifying conclusion.
The story dates back to 1998, when the government of the former prime minister Ivan Kostov took a fateful decision to privatize Bulgartabac, the state-owned cigarette maker. The first real steps to sell the company were taken in 2000, when the Bulgarian government officially put Bulgartabac up for sale. Several international companies expressed their interest, but it never went very far and an agreement was not reached.
In 2002, the Bulgarian parliament approved a new privatization strategy for Bulgartabac and over the next several years, the government made two more unsuccessful attempts to sell the company to Tobacco Capital Partners.
In 2004, the Bulgarian government came close to selling the company to British American Tobacco (BAT), but the deal fell through because of pressure from the ethnic Turkish DPS (Movement for Rights and Freedoms), an ally of the government of Simeon Saxe-Coburg that was in power from 2001 to 2005. DPS said it acted out of concern for voters. many of whom were tobacco growers, but the scandal created caused the economy minister Lidia Shuleva to resign.
Then, in 2009, two of the least profitable Bulgartabac’s plants, one located in the city of Plovdiv and the other in Stara Zagora, were sold off on the Sofia Stock Exchange for BNG31 million (US$21.5 million) and BNG18 million (US$12.5 million) respectively.
The stage was now set for the surprisingly swift and furious denouement that followed.
The two remaining plants (in Sofia, the country’s capital, and in Blagoevgrad) were the largest and most profitable of the original four. Today, they comprise what is known as Bulgartabac Holding Group AD, with a domestic market share of 34%.
In February 2010, it was decided to pick a consultant firm to oversee the sale, and the choice fell on Citigroup Global Markets Ltd.
In 2011, the Bulgarian government set a target of raising BGN450 million (US$318 million) through privatization of state assets before the end of the year. However, by summer 2011 that lofty goal looked as elusive as ever, with sales of only BGN13 million in government coffers. The shortfall made the sale of Bulgartabac ever more pressing and so the start of the tender was announced.
Interested parties
Originally, there was no shortage of interested parties.
To begin with, there were four major tobacco companies: the aforementioned BAT as well as Japan Tobacco International (JTI), Philip Morris Bulgaria and South Korea’s KT&G Corporation. However, the latter three dropped out of the tender at an early stage.
Six other entities seemed interested, but after the initial probe, four of them dropped out of the race: local law firms Kambourov & Partners and Dzhingov, Guginski, Kiuchukov and Velichkov; Bulgaria-based King’s Tobacco, which purchased Bulgartabac’s former plant in Plovdiv; and US-based Science Capital Management, LLC.
The remaining challengers to BAT’s bid left standing were two Austrian-based companies: an investment fund called BT Invest and a consultancy firm CB Family Office Service from Gratz.
The bid from BAT seemed fairly straightforward, since it had already tried to acquire the company once in 2004, but Bulgaria was almost immediately swept by rumors that unknown Bulgarian entities were behind one or both remaining bidders.
In the meantime, the deadline for purchasing information memorandums for Bulgartabac was set as July 25, 2011, at which point the Bulgarian Privatization Agency was supposed to issue registration certificates.
As for the final – and binding – offers, the deadline was set for August 29.
Three main bidders
Shortly after the other bidders dropped out, news about one of the parties, BT Invest, started to emerge and it quickly became clear that while registered in Austria, BT Invest was, in fact, fully-owned by Russia’s second largest bank, VTB. (Indeed, later investigation revealed, that BT invest was actually owned by VTB Capital, a company registered in Cyprus, but fully owned by VTB Bank that is, in turn, owned by the Russian government).
As the bidding process was – uncharacteristically – gathering steam, speculation was rife regarding BT Invest, its true owners and its intentions. Many Bulgarians believed that BT Invest was bidding on behalf of Tsvetan Vassilev, the head of Bulgaria’s Corporate Commercial Bank, an allegation Vassiliev vehemently denied. Suffice it to say, it was not an implausible idea: since Corporate Commercial Bank already owns 8.11% in Bulgartabac, purchasing the 79,83% majority stake that the government put on sale would have put Corporate Commercial Bank squarely in the owner’s seat.
On July 25, as the deadline to purchase an information memorandum drew to a close, one of the three bidders, Austria-based CB Family Office Service, failed to transfer the necessary deposit of BNG20,000 because of “operational problems with the bank transfer.” Hours later, it was announced that CB Family Office Service was withdrawing from the tender.
Painful truth
Although both of the remaining bidders made the transfer on time, the rumor mill delivered an unnerving verdict: the only strategic investor “left standing” had no intention of submitting a bid and was only purchasing the information memorandum to gain some insight into Bulgartabac’s assets.
The rumor turned out to be painfully true a week later when, on August 1, BAT announced its withdrawal from the tender. The news delivered a crushing blow to the Bulgarian government.
With its options somewhere between severely limited and non-existent, the government made a decision to proceed with the sale to BT Invest amid protests from Bulgaria’s tobacco industry syndicates and tobacco unions, who opposed the sale on the grounds that the situation made the bidding superfluous – being the sole player still bidding, BT Invest could simply offer the minimum asking price, which is a scenario any auctioneer would be wise to avoid. Their fears were promptly confirmed when VTB-owned BT Invest submitted an offer of €100.1 million (US$136 million) for the purchase of 5,881,380 shares corresponding to 79.83% of Bulgartabac’s capital, only €100,000 higher than the minimum asking price set by the Bulgarian government.
Although BT Invest also promised to invest BGN2 million in the first year of ownership and BGN5 million in the second year, the union cried “foul” and insisted the government cancel the sale and open a new tender. The Bulgarian government balked at the suggestion to organize what would have been the sixth attempt to sell the former tobacco state monopoly. It insisted that the offer also bound BT Invest to purchase 5,000 tons of Bulgarian tobacco a year for the next five years and to additionally invest BGN7 million in Bulgartabac as part of its investment program for 2012 and 2013.
With its target of raising BNG450 million still hanging heavy over its shoulders, the Bulgarian government decided to go ahead with the sale and the Supervisory Council of Bulgaria’s Privatization Agency gave green light to the deal after five-hour long deliberations with over 500 Bulgartabac workers protesting outside. The unions were particularly worried about what was to become of Bulgartabac after the sale.
The saga ends
It didn’t take long to discover what the new owner had in mind. Although the signed contract prohibits the resale of the tobacco holding in the next 10 years, this condition can be circumvented through a change in the ownership of BT Invest. Some reports in the Russian media claimed that VTB Bank was considering the sale of individual assets of the Bulgarian cigarette maker. They claimed that the original intention of the buyer had been to sell the company outright for a better price, but it has instead opted to sell the assets one-by-one in hopes of getting more money.
Thus came to the end a 13-year-long saga of Bulgartabac, an affair that crawled at a glacial pace all the way until its breakneck conclusion in a blaze of corporate sleight-of-hand. With its cigarette-making days almost certainly behind it, it now seems all but certain that the former monopoly will go out in a puff of smoke - and mirrors.
