On April 24 the Bulgarian Commission for Protection of Competition gave the go ahead to the sale of 75 petrol stations from state-owned gasoline retailer Petrol to Lukoil Bulgaria, the local subsidiary of the Russian firm. Those filling stations, which account for 30% of Petrol’s annual sales, will pass over to Lukoil for $242m.
The stations to be transferred are among the most profitable in Petrol’s possession and this is reflected in their price tag. The average value of $3.2m per station is much higher than the $0.8 – 1.2m rate that filling stations are usually worth in Bulgaria.
In addition Lukoil will pay $126m to acquire the Iliantsi petrol depot in Sofia which, with a storage capacity of 50,000 cubic metres for diesel and 30,000 cubic metres for petrol, represents the lion share of Petrol’s wholesale business.
The deal leaves Lukoil with 180 filling stations in Bulgaria. Besides, the company owns the country’s only refinery, the Neftochim plant, based in the Black Sea coast town of Burgas. Lukoil Neftochim has been named as the biggest taxpayer in Bulgaria and Lukoil provides one-quarter of the total tax revenue and 9% of the gross domestic product.
Some industry analysts argue that the deal will make Petrol lose its leading in the domestic fuel distribution market. Indeed, prior to the buyback, the company had a market share of 20%. But it is now expected to come level with Lukoil at around 18% market share each. The other two main players in the Bulgarian market, British Dutch Shell and Austria’s OMV, each account for 16% of the market.
The sale ended an ongoing spate of disputes and court cases between the two companies. In August 2006 they signed a framework agreement for establishing a joint venture but the plans were cancelled in January 2008, as Petrol felt that the assets originally put forward had substantially increased in value. Lukoil also agreed to drop court claims against Petrol over an overdue payment to its Neftochim oil refinery. A statement from the two companies indicated that, “The agreement provides for withdrawing of all mutual legal claims and settling them in a way satisfying to both parties”.
In recent months, Lukoil committed to further downstream investments in the Balkan region, with plans to expand its retail network in Montengro and Bosnia and the announcement on April 30 the company would also like to buy Croatian fuel retailer Europa-Mil. The day before Lukoil revealed it would invest a total of $25bn in its global refining and retail businesses over the next 10 years.
Bulgaria has taken a leading role in the expansion plans of Russian energy firms in recent years with President Putin declaring that the country had become “a key link in the European energy chain”. Lukoil’s push into Bulgaria is part of its latest move in a long-running campaign in the Balkans to carve out a presence for itself in wider Europe.
Despite the loss of business that will incur from the sale, Petrol maintains a strong position. With the balance sheet value of the assets sold standing at just $40m, the company has netted $320m in consolidated income and shares in the company finished trading 20% higher after the announcement of the sale on April 24. Company representatives say they will invest in new outlets and the purchase of existing stations from local competitors adding 140 filling stations to their current tally of 519 before the end of 2010.
Tsveten Dimitrov, chief financial officer of Petrol, told OBG that the company had developed a pre fabricated station with no underground storage that was three times cheaper to set up than regular stations. These stations will be a key feature in the company’s strategic goal of expanding its station network 100km into Romanian and Serbian territory, where key cities are expected to generate strong returns on investment. Ratings agency Standard & Poor’s declined to change Petrol’s CCC+/negative outlook following the deal, saying it was still unclear how Petrol’s relationship with Lukoil would develop in the aftermath of the deal.
Petrol’s bank balance is also in good shape with the company announcing first quarter profits for 2008 of $35.6m, eleven times the figure for the corresponding period in 2007. Dimitrov told OBG that while Bulgarian margins on fuel sales were the lowest in the EU in 2006, these margins grew to $0.17 per litre in 2007 and profit was compounded by a 15% increase in Bulgarian fuel sales. In addition the average volume of fuel purchases has increased from 5 .1 litres in 2006 to over 9 litres today.
With Bulgarian sales of new cars up 26% in the first quarter of 2008 year-on-year combined with used car sales also growing strongly, domestic demand for fuel is set to climb. Considering the $1.5bn of EU funds allocated for the upgrade of road infrastructure along trans-European corridors by 2015, Bulgaria can also expect greater freight traffic between Greece, Turkey and the rest of the EU in the medium-term future.
Increased competition could speed up the decline of independent fuel retailers who, only two years ago, made up 40% of the country’s 3100 stations according to Dimitrov. With the potential rewards so great, it is little wonder why the major fuel companies are all vying for a larger slice of the pie.
