Agrokor: Causes and possible solutions to the crisis of the Croatian giant

Agrokor’s financial woes have sent shockwaves throughout several Balkan countries; apart from exerting massive influence on Croatia’s economy, the company employs about 20,000 people in neighbouring Bosnia and in Serbia.

In an effort to save the company from going under, Agrokor’s creditors appointed a turnaround expert to lead the heavily indebted Balkan food and retail giant out of its financial crisis, potentially ending the four-decade rule of founder Ivica Todoric.

Despite its rapid expansion and the size of its operation, Agrokor remains privately held, with Todoric still holding 95% of the group, and to a large extent it is still run like a private company. It is also a family concern; Todoric’s three children – daughter Iva and sons Ante and Ivan – are all involved in the company, from the family’s base at the 16th century Kulmer Castle in Zagreb.

Indicating the depth of the problems at the aggressively acquisitive group, new Chief Restructuring Officer Antonio Alvarez of consultancy Alvarez & Marsal has warned that there is no guarantee it can be saved.

“Time is of the essence. The situation is pretty acute,” Alvarez told a press conference on April 4, according to Reuters. “There is no guarantee we will succeed. This is one of the most challenging situations that we are going to face,” he added.

So, how did the Croatian retail giant get into so much financial trouble? “Debt-financed expansion, lack of strategic efficiency, miserable profitability, huge labour costs (more than 12% to turnover, much higher compared to competitors) as a result of [Agrokor’s] national champion mission in Croatia (and Slovenia), and long lasting economic recession (2008-2016), lack of transparency and proper corporate governance, all of that led to balance sheet imbalances/financial leverage problems,” says Damir Novotny, managing partner of managing consultancy T&MC Group.

Novotny adds: “Since Agrokor doesn’t publish consolidated and audited financial reports, its debt instruments have been sold as junk, Novotny says. “For almost a decade the company financed expansion with mid- and long-term junk bond instruments, which led to enormous financing cost.” 

In an interview for the Zagreb-based Telegram newspaper, a Faculty of Economics professor, Dr Josip Tica has a similar stance to Novotny’s and says that it was actually Agrokor’s debt-financed expansion model that has served it well for decades suddenly imploded.

Todoric had mainly used debt finance to grow his business from a small flower company founded back in 1976 – one of the many small enterprises allowed to operate when Croatia was part of the former Yugoslavia – into a regional empire spanning the food and retail sectors across the region.

Dr Tica says that the high interest rate amount that Agrokor had been paying was also a result of Croatia’s bad credit rating, and not only of the chosen business model. “In the last seven years, the interest rate costs grew much faster than the company’s debt. Another problem was a six-year-long recession in the country in which, due to a decline in GDP, was almost impossible to generate revenue growth big enough to annul the contraction of the entire Croatian economy”.

As far as the company’s operations in Serbia go, the Serbian PM Aleksandar Vucic said that that Agrokor would not bring Serbian suppliers down with it. Supermarket chains Mercator S, IDEA and Roda, which all operate under Agrokor, are doing fine in Serbia and have been regularly settling their financial obligations towards suppliers and the state. The companies that are closely tied to Todoric’s system like Dijamant, Frikom and Mivela could experience problems, but the state will try to prevent this by controlling the cash outflow from Serbia – the Serbian PM said.

On Friday, 7th April, Agrokor filed a request to the Commercial Court of Zagreb for activating Lex Agrokor, i.e. the Law on Extraordinary Management Procedure in Commercial Companies of Systematic Importance to the State.

– I’ve reached the said decision confident that it is the best interest of each individual employee, partner, supplier, all other participants and the entire economy – Ivica Todoric said and invited “all those who can contribute to Agrokor’s uninterrupted continued operations, to saving jobs and enabling further development to do everything in their power for this to be realized”.

The Croatian Parliament previously adopted the Law on Extraordinary Management Procedure in an urgent procedure. The law enables the extraordinary management procedure in companies with over a billion euros in debt and 5,000 employees.

At the government’s suggestion, the Commercial Court appoints an extraordinary commissioner representing the debtor. It is still not known who this might be. The commissioner may have deputies and selects a restructuring advisor within 30 days of their appointment. Optionally, auditors and other advisors are appointed as well.

An advisory body of five is formed, containing a representative of the workers, and the creditors’ council is formed as well. The extraordinary management can last for up to 15 months, and, if the stabilization and restructuring process fails, the company goes into bankruptcy.

(Vecernje Novosti, Telegram, IntelliNews, eKapija, 10.04.2017)

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