Cigarette Packages

Economic News

22 Jul 2010
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This week has seen some mixed fortunes for the tobacco industry in Bulgaria. While, on the one hand, new regulations are set to largely curtail tobacco-product advertising, on the other, the long-running saga of Bulgartabac's privatisation took a step forward with a new sell-off strategy decided.

Inspired by European Union requirements, June 18 saw parliament pass a series of amendments to the Tobacco and Tobacco Products Act. These changes are aimed at restricting cigarette and other tobacco products' ads to the premises of shops selling them, and to factories and plants owned by the manufacturers. Tar and nicotine content will also be falling, while health warnings will become mandatory and more explicit.

All of which is likely to be good for Bulgarian's health, even if it will also hit manufacturer's profits. Yet, the question of who those manufacturers will be by the time the changes make a major impact is still unresolved, as Bulgartabac, the country's large state tobacco giant, continues to edge forwards slowly towards sell off.

Morgan Stanley - which is handling the privatisation - announced at the end of last week a new strategy in which Bulgartabac would be sold in two major packages. The first of these will contain the Sofia and Plovdiv Bulgartabac operations, while the second contains the Blagoevgrad and Slance Stara Zagora Bulgartabac outfits.

This effectively means selling off Bulgartabac's brands in two groups. Sredets, Trezor, New Line, MM, Femina and Arda cigarettes go with the Sofia and Plovdiv package, while Victory, Prestige, Melnik, Nevada, Country, Verea and Shipka brands go with the Blagoevgard and Slance Stara Zagora group. The factories that go along with these brands will be sold with the brand and within their respective group. The state holds 85% of Blagoevgrad Bulgartabac and 78% of all the other mills.

Deputy Prime Minister and Minister of Economy Lydia Shouleva also gave reporters the timetable for the sell off at the beginning of July. The tender for the tobacco companies will take place in two stages, with no preliminary offers required. The final bids should be submitted by September, the buyers will be named by November 30 and the deals should be finalised by the end of the year.

Potential candidates will have the right to bid for the two packages, but will be allowed to buy only one of them. Such bidders must also have a minimum of five years of experience in cigarette and tobacco production, and 2003 net sales of over 500m euros.

Market watchers report that there are several major tobacco giants interested in bidding. These include Phillip Morris, BAT and Gallagher, while Imperial Tobacco and the Korean-state-owned KT&G are also rumoured to be in the running.

Bulgartabac is certainly a major sell off. The company has 22 subsidiaries in Bulgaria - 12 processing factories, nine cigarette factories and one producer of tobacco dryers, filters and packaging. It also has five subsidiaries in Russia and one each in Ukraine, Romania and Serbia. Meanwhile, a 12.8% stake in Bulgartabac Holding is quoted on the Sofia Stock Exchange.

It is also a major employer, with the prospect of privatisation none-too-popular with the workforce, which fears major redundancies. The company is due to begin large-scale restructuring that will involve staff cuts, asset sell-offs and the closure of loss-making units. Aware of the social - and political - impact this will have, the government has established a social fund, which will be financed by money from the sale of the factories and from Bulgartabac's profits.

There is also opposition in parliament to the way in which the sell off is to be handled. Alongside the new regulations restricting tobacco advertising, amendments to the Accounting Act and Commercial Code were also filed by ruling National Movement Simeon II (NMSII) Party deputy Mariana Kostadinova. These will change the current requirement at Bulgartabac that any deals on property exceeding half the assets of the company have to be approved by a shareholders' meeting.

Kostadinova argued that the sell-off process would be greatly speeded up if the executive bodies of Bulgartabac could make these deals without having to seek shareholder agreement. The danger was there, Kostadinova said, of a single shareholder blocking the whole procedure.

Under the new system, all the decisions will be taken by the steering committee and the supervisory board. These institutions are heavily populated by government ministers, a fact which provoked an immediate cry of outrage from the Novoto Vreme Party, a breakaway group from NMSII.

"The incumbents are scheming to drain Bulgartabac," Novoto Vreme deputy Miroslav Sevlievski warned June 18. The government is accused of making the sell off non-transparent and of usurping shareholders' rights.

There is still some way to go then with the political environment for the sell off - as indeed, there is for the legal and technical grounds. Price is to be the central factor in deciding who wins the tenders, yet apart from that, the exact methods for the privatisation are still to be defined.

Yet the process is at least underway, even if the eventual winners will have to make do without much in the way of advertising.

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