Transcript Bulgartabac Holding AD Tina Boyadjieva Rob Ferguson Renee Hartmann Jeff Walwyn Emerging Market Finance Agenda  Overview of Bulgaria  Bulgarian Tobacco Market History  Bulgartabac Overview  Opportunity Discussion 

Bulgartabac
Holding AD
Tina Boyadjieva
Rob Ferguson
Renee Hartmann
Jeff Walwyn
Emerging Market Finance
Agenda
 Overview of Bulgaria
 Bulgarian Tobacco Market History
 Bulgartabac Overview
 Opportunity Discussion
 History of Past Deals
 Current Opportunity
 Cost of Capital
 Valuation and Sensitivity Discussion
 Proposed Solution
 Real Options
Bulgaria – A Snapshot
 Population: 7.8 million
 32% rural; 68% urban
 Currency: Lev
 1.96 lev = 1 Euro
 Communist govt. from 1944 –
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1989
Ruling Party – National
Movement for Simeon II
Next Election: 2005
Slated for 2007 EU entry
8.5% Turkish population
Bordering Countries: Turkey,
Former Yugoslav Republic of
Macedonia, Serbia, Romania
Bulgaria’s economy
+ Politically stable
– Organized crime
+ Secure currency
– Tension btwn. social
+ Low inflation
+ Adopting EU laws
+ 4-5% GDP growth
+ Little ethnic or
religious conflict
+ Low labor cost pool
+ Close relationship
with IMF
and economic growth
–14% unemployment
rate
–Avg. wage <
$100/month
–Unsuccessful
privatization efforts
–Bureaucratic and
slow
Bulgaria’s Tobacco Market
 Leading grower of high quality tobacco
 Tobacco and tobacco are 40% of agricultural exports and 5% of
all exports
 Cigarette smuggling an issue
 Large black market for foreign brands
 No anti-smoking movement yet
 56% of men and 32% of women smoke
 Accession into the EU will increase competition and
lower import duties
 Tobacco industry has been large employer of Turkish
population
 Bulgartabac has near local monopoly
 85% market share
Bulgartabac - company
 1947 – 1993 tobacco unit of BCP
 1993 – becomes a Holding with 22 subsidiaries
 2005 – one of largest tobacco companies in SE Europe
 85% market share on the domestic market
 One of largest tax payers and generates 4% of the BG revenues
 Involves roughly 250,000 minority population in the production
 Government purchases 13,000 tons/ year at determined prices
 Owns around 50 trademarks
 93% owned by the Ministry of Economics
 60 bill cigarettes annual production, 75% produced at 3 plants
Privatization process
 Essential to accession to EU – open market
requirements for entry
 Special government requirements:
1. Maintain tobacco production purchasing
2. Keep most of the current employees
3. Government has control over tobacco price until 2007
4. Government still maintains a stake in the company
 Establish a “Tobacco fund” to transition minority
workers
Failed BAT deal
 October 2004 BAT:
1.
2.
3.
4.
Offers 200 million euro for 3 largest plants
Promises to keep purchasing 7,000 tons of production
Promises to use at least 30% Bulgarian tobacco in its
production
Pledges to make Bulgaria tobacco production center of the
region
 Deal fails after 3 months: MRP and BSP don’t
think it is in the strategic interests of the country
Cost of Capital
 Using Institutional Investor country credit rating,
Bulgaria is more risky than the United States
(Rating – 51.6)
 Cost of Capital Worksheet implies a 19.8% cost
of equity
 Organized Crime Expropriation
 Creeping Expropriation
 Operational Autonomy
 Resource Risk
Valuation considerations
 Three scenarios developed
 EU membership could have various different
effects
 Increase imports of foreign brands
 Open up new markets for Bulgarian made products
 Growth is uncertain given previous government
control
 Labor costs are very high and government
wishes to guarantee employment
Valuation considerations (cont’d)
 Conservative case:
 EU entrance reduces sales as imports increase competition
 Slow reduction in labor expenses
 Most likely case
 Declining labor costs
 Conservative growth
350,000
300,000
Enterprise Value
 Best case
 Significant labor savings
 High growth in export sales
Enterprise Value Sensitivity Analysis
250,000
200,000
150,000
100,000
50,000
0
Conservative Most Likely
Best Case
Recent offer
Sensitivity analysis
 Cost of equity of 19.8%
 Recent Offer suggests a lower cost of capital
 Terminal Value could be understated
Cost of Equity & Terminal Growth Sensitivity
$900,000
$800,000
0% growth
Enterprise Value
$700,000
1% growth
$600,000
2% growth
$500,000
3% growth
$400,000
4% growth
$300,000
5% growth
$200,000
Recent Offer
$100,000
$0
10%
15%
20%
25%
Cost of Equity
30%
35%
Real Options
 Input/Output Mix Option
 Current production mix
 Inputs – 50% Burley, 33% Virginia, 17% Oriental
 Outputs – 15% bargain brands, 42% premium
 Create different mix of premium/bargain to match optimal
profitability
 Intensity/Operational Scale
 Currently running at 30% of 140 thousand ton processing
capacity
 Valuation is also based on current capacity
 Analogous to option to build additional plant, without the capital
investment
Solutions/Recommendations
 Government
 Continue to pursue strategic investor
 Continue to sell parts, rather than whole
 ABC – Always Be Closing
 Each year postponed is hurting potential accession to EU and ICCR
 A sale gains FDI and will prove minority protection (Turkish)
 Purchasing Party
 Create social solution
 Concessions to relieve social and political risk
 Appease minority populations
 Value is not the sticking point
 Use past deals as a starting point - learn from the failures
 Find flexibility around operational autonomy