The company should be privatized in a near future. How do you perceive this process?
The company is still owned by the state that has more than 95% of the market share in Bulgaria. Bulgaria has always been a country well known for its tobacco products - both tobacco as a raw material for other multinationals, and the cigarettes - which have been quite well known in, let say, Eastern Europe. In this market, Bulgaria was the major supplier of cigarettes in the Soviet Union at that time. Also, our cigarettes were well known in countries like Hungary and the Czech Republic. Nowadays, I think the major task we have is to try to put the management of the company at a different level making it more business oriented and less state oriented. This is our major challenge.
Can you tell us more about the restructuring process your company will undergo during its privatization?
In principal, we think that we have less than one year in a non-privatized business. It is very optimistic of us to think that we can restructure this company within this time frame. What we are trying to do is to optimize manufacturing, sales and marketing, while having in mind this time limit. What we have done so far is to restructure the headquarters. For example, we have four major departments within the head office - one is manufacturing, which includes tobacco processing and cigarette manufacturing; second is finance - accounting, analysis and controls; sales and marketing department - which previously was part of the cigarette branch and now is a separate department; and we have established a foreign investments department to deal with the subsidiaries that BulgarTabac has abroad. We have subsidiaries in Russia, Ukraine, Romania and Yugoslavia, which are manufacturing and selling our products. In terms of further restructuring the group of companies (because we have overall 22 daughter-companies) there is a lot to be done. We are not going to do it before the privatization, but the potential is there. I think that the future investor, having a freehand in doing this, will have a very, very easy time getting better returns within a short period of time. There are some obvious things, which can be done, and we will try to do some of them, but others will be left for the new investors. But we know exactly what can be done and how it should be done. For us, being state owned is a little bit of a limiting factor. This I presume will not be a limiting fact for any private owners.
How much of the Holding will be privatized?
I will speak from our point of view, because the government is really the seller and we are the company to be sold. So the government is establishing the strategy and we are trying to help them in that respect. So, from that point of view, the final strategy and opinion should be from the government and namely from the Privatization Agency, because they are the representative of the state, who does the deal. But from our point of view, we are selling everything, and we are selling as fast as possible.
Some people are complaining about other privatization processes, saying that companies are being sold at bad prices. Aren't you afraid that this situation could be reproduced if the company is being sold as fast as possible?
It really depends. The English language from this point of view is maybe not the best to use, because some times in English 'as fast as possible' means really you don't pay attention. But when we say 'as fast as possible' we mean as fast as possible. We have to do our best 'as possible' with the price. So, if we don't get a good price, that means we haven't done our job correctly. Doing what we have to do, I think, we will definitely convince investors to pay the price that we are asking for. Second, there are two sides - we are selling the business, but the seller is the state. So there could be some administrative problems, which I am not aware of, but from that side the Privatization Agency has really been make a big effort. I know that they are doing the right thing now, but from their point of view, they should handle the administrative process. From that point of view it includes legislation and a lot of negotiations. The interests of the investors have been very, very big, so they have to coordinate that as this is one factor that could mean some issues as well. I am sure if we all concentrate on this, it shouldn't be a problem.
Is BulgarTabac going to be sold through the stock exchange?
I think this is the idea. But this is really secondary to the main idea to sell to a new private owner. That can be done, let say, with much less effort than on the Stock exchange.
A key to privatization is to be in a contact with partners who are willing to buy. Do you have any comments on this?
We did a presentation to the first group of potential bidders. There were 12 companies represented, such as Phillip Morris, BAT, Imperial Tobacco, and there were some investing banks like the Deutsche Bank. We did this when the negotiations with the advisor to the Agency of Privatization, "Credian Stalt" were finalized last week and the contract was signed. So maybe that was delaying things a little bit. From that moment on I think they should be the driving force in communications with investors asking them what they need really helping both sides in the process.
Tobacco, in Bulgaria, is an image-making product. Don't you think that by selling your Company to foreigners you country will loose the opportunity to use this product to promote itself?
Tobacco will remain Bulgarian. I don't think that ownership matters from this point of view. In terms of keeping the company as a Bulgarian-multinational, which is the idea - I think this can be done. This is actually up to the future investor and depends who the investor will be. If it is an institutional investor, then he might think of making it a Bulgarian multinational. If it is a strategic professional investor, then I don't think that this will be an option for him. So that is to be considered the target of privatization. I think experiences in many other countries show that a success for privatization brings a lot of value, and in some cases there are no negative feedbacks at all. So, privatization is really a success story in most cases. As long as we do our part well in selecting the future investor, the business has a lot of opportunities. Putting the two together should really make a success story after privatizing the company. First, I don't think that the Bulgarian image will disappear, because the tobacco and the brands will stay. That is definite. Second, this is a potential bonus for any investor, whether strategic professional or institutional investor. They will come to buy Bulgarian tobacco, develop the Bulgarian brands and hopefully use them to develop foreign markets as well.
What is the market share of the company and do you think that your infrastructure can sustain growth?
The very important thing is that the market share
of the Bulgarian market is above 95%, and it will
remain above 95%. This is because the market share
is driven by two main factors: quality and price.
We are far better than our competitors in quality
and price; the so-called value for money. In terms
of people, definitely a future investor will be
buying a lot of intellectual potential, intellectual
experience, professional experience and strength,
which will help him develop this business in a way
he would like to - marketing, blends, cigarettes,
incl. packaging, everything can be developed using
the capacity of the local experts. |
In terms of technical abilities and technological equipment - we do have top-level technical equipment. In principal this is not a deal for the assets. It is a deal for the market and for the brands. In order to supply the market and support the brands, we do provide the technical background as well. In our manufacturing facilities we have enough capacity; good, top-quality capacity to supply the market which we have at the moment, and even able to deal with exports. The exports can be local brands, or can be the other brands of the future investor being manufactured here and exported.
What about the Bulgartabac exports at the moment?
That is another positive side that I stated before and it is not exactly about exports; it is about our manufacturing facilities like top places in Russia with fine manufacturing facilities. However, at the moment they are under performing. The main priority for us to put them in order but the potential is there for the Bulgarian brands, which used to have a very high market share, and have a very good image. The potential in the country is to buy these in cheaper volumes maybe within 3 years and that is something, which can be done easily. I definitely think that this will be the case in Russia in terms of history, because Bulgartabac was the major provider of cigarettes to that market, and also to Ukraine. With some efforts, we can also have a good market share in Romania and Yugoslavia. However, I think that Russia and Ukraine will provide the strategic growth for this company, if needed in the next three years.
Local markets - I don't think that we can have a higher market share but having the cash inflow of the local market, provides a very secure background for any investor.
In terms of statistics, could you please give us some numbers on your staff, office size as well as information on your previous years' operating profits?
I do have them in my materials. Off the top of my head (I can provide approximate numbers later) in terms of background, we are talking around approximately $230 million in net sales. In terms of head count - we have roughly 9000 people overall. It's very important when we talk about figures to say that this is a company that has not been restructured. It was set up a long time ago in a very different environment. In terms of profits, I would not even try to speak about profits, because usually from this net sales level you should realize that around 15% are profit. In our particular case we have a group of legal entities, which are profitable and another group of entities which are making losses. On a consolidated level - our consolidated profit is much lower than the potential of this group. This is because a lot of the losses really are caused by inefficiency and unnecessary under capacity. This can be restructured and then we can focus on the profitable side and forget about the loosing side. This is a huge potential to someone who will come and can do this almost immediately. In terms of our selling strategy - I think what we want to present to a future investor is the potential of the company. Because that is really what makes sense in buying the company, and definitely we'll try to show how this can be done. Talking about potential and how you do this everyone knows that this will be tough but we do know this can be done. If for any reason privatization is delayed, which we don't want to happen, we will actually do this. There is no problem for us. But from our perspective now it is better that we don't make decisions which we will have to rethink in 6 months to 1 year after the privatization. So, we are doing the basic obvious things that have positive impacts.
Are you confident in the future?
Personally, I am very confident. I think this company has a very interesting and promising future. The market is predetermined by the current price and quality. For example, our current price is approximately half of the price of our present competitors. So, there is a lot of ground in terms of price. Naturally, if one of the competitors or several come and manufacture here they will have to lower their prices, but there is definitely a potential for increased profitability.
The selling price for competitors is higher due to import tariffs. When Bulgaria joins the EU, and these taxes become non-existent, will you still be competitive?
Import duties are high and our manufacturing costs are quite low. So these factors will determine our competitor's prices. With the loss of the import taxes, I am not sure that the Bulgarian brands will remain as successful just because Bulgaria will join the EU. In terms of pure pricing it will be hard to gain a market share in that direction but with a good marketing strategy I am sure this could be easily done.
You have the brand and you have the price, what about the company's image?
At the moment we have put in our strategy developing a very high quality, blend and brand. Currently we don't have cigarettes, which compete with categories like Marlboro and Lucky Strike. So, we don't have our products priced and promoted to compete with them. So that is what we are trying to do in the short run. In terms of other market activities, we'll try to support our brands preparing them for a less regulated and more competitive market. From a purely marketing point of view, the pricing and the market share has predetermined the very little marketing activity until now.
You have been recently appointed here and probably you will not stay long after the privatization, do you see that task as a burden or as a challenge?
In principal it is very interesting challenge for me, and it is also a good step in my career. This is a very good opportunity for me to try to change the image of Bulgaria, and change the economic factors behind its image. In the past there were a lot of good things done, in the terms of development of the country. There were some strange things done as well, which did not help the country. They did not help me as a Bulgarian living abroad either. For me it is a good combination of all these factors.
What final message would you address to our readers?
We are talking about a company, which at the present has a very stable position, but the future prospects are much better and quite obvious. We are not talking about nuclear science, but we have to do some very logical business steps, which will clearly make this potential shine. From that point of view anyone who deals with the company, whether he is an investor or a client will benefit from this potential.
Note: World Investment News Ltd cannot be held responsible for the content of unedited transcriptions. |
