Bulgaria's tobacco industry is undergoing radical restructuring, with the sale of state tobacco giant Bulgartabac. Sale of the firm's factories have met with high demand on the stock exchange, and foreign investors have purchased some of the holding company's key subsidiaries.
Bulgartabac Holding Group, previously 80% state-owned and in the process of privatisation, is considered one of the leading tobacco companies in Central and Eastern Europe. Its activities include tobacco buying, processing, leaf trade, the manufacturing and export of cigarettes and research and development. Before the restructuring started, it controlled 95% of the Bulgarian tobacco market, and 24% of sales share in the country. The company exports to Israel, Latin America, the Middle East, the Far East and exploratory exports to Italy and Austria were recently launched.
The sale has been widely welcomed by the business and investor community
"I believe that this is the right decision, but it has been made quite late," Todor Breshkov, the general manager of First Financial Brokerage House, told OBG.
"Nevertheless, the only thing that the government and the holding company can do is sell off the subsidiaries of the company to put them in a more competitive position. All the big multinationals are now on the market so in five to six months Bulgartabac should be selling all parts of the holding to local and international investors."
Bulgartabac confirmed last week that it had received one offer for its 99.95% stake in the Sandanski plant in the south-west of the country. The offer of a reported Lv2.308m ($1.54m) from Greek firm Leaf Tobacco Michaelidis exceeds the original asked price of Lv2.1m ($1.4m) for the shares package.
Bulgaria's government has previously made several unsuccessful attempts at selling Bulgartabac since 2001.
The sale is expected to be followed by that of two more subsidiaries, SmolyanBT and KardzhaliBT. The two companies will be offloaded through a competitive procedure, and the management of Bulgartabac is expected to approve the sale in the next week. Plans are also being drawn up for the privatisation of the Plovdiv and Slantse Stara Zagora plants through the Bulgarian Stock Exchange. Bulgartabac has already sold two production units on the local bourse, raising a total of Lv32.32m ($21.5m).
Last year, Bulgartabac sold its own share in packaging company Yuri Gagarin on the Bulgarian Stock Exchange, achieving Lv32.4m ($21.55m). 67% of the shares were bought by Baranco EOOD, a subsidiary of Cyprus-registered Baranco Company.
Earlier this month, labour unions met with Rumen Ovcharov, the economy and energy minister, to discuss future sales of Bulgartabac subsidiaries, arguing the case for privatisation through the stock exchange, the local press reported. Leaders from two major unions told Ovcharov that stock exchange privatisations were more transparent and eliminated the risk of preferential treatment of candidates and shady preliminary talks.
The restructuring plans of Bulgartabac were laid out in October, when the management announced that it would start negotiations with trade unions on staff redundancies. Hristo Lachev, the executive director, reported that high costs were damaging the company's competitiveness. The restructuring would also involve the sale of "non-core assets" and unprofitable factories as well as the consolidation of production and equipment. This streamlining would help develop the firm's "aggressive export policy", as well as reinforcing its strong domestic position.
According to the Bulgarian Stock Exchange, the net profit of Bulgartabac Holding reduced by 3.57 times in the first three quarters of 2006. The efficiency review of October clarified the challenges facing Bulgartabac. The south-western Blagoevgrad plant employs 1250 people with an annual output of 12,000 tonnes. As an efficient productivity average is generally considered to be 300 workers per 10,000 tonnes of production, it is thus this plant which is expected to take the biggest personnel cuts.
Bulgartabac was one of the first Bulgarian companies to be exposed to new duty-free competition in the first three weeks of EU membership. Brands such as Viceroy and Pall Mall have been undercutting Bulgartabac brands such as Sredets, Nevada, GT and higher-priced Victory, if only by a few cents in some cases. Nonetheless, the company insisted that it would not cut prices immediately, preferring to wait and see how the market stabilises over the coming months.
However, last week Bulgartabac announced that it would indeed cut the prices of 21 tobacco brands. The cost reduction, to be introduced on February 10, equals 15% on many of its products. However, the best-selling Victory brand remains unchanged. Bulgartabac's management reversed the decision that they could not afford to lower prices and so cut profit margins.
At a press conference, Bulgartabac management blamed a decrease in prices and a 25% drop in sales on smuggling, and claimed that if the problem were tackled, Bulgartabac would remain the market leader. The management asserted that it was not worried about increased competition.
In 2006, at the time of excise harmonisation to comply with EU standards, the government predicted that new, higher excise duties would cause cigarette prices to increase by 55%.
Bulgartabac's size, experience and potential mean that its subsidiaries have a strong role to play in the region's tobacco industry. Through liberalisation, the national tobacco industry should remain competitive and efficient and enhance its role as a key exporter.