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Bulgartabac Privatization Gets Back On Track

February 23, 2004

( Research Service)- According to a report Friday from the Bulgaria News Network and the Ministry of Economy, yet another multi-national- Britain’s Gallaher Group– is eyeing Bulgaria’s tobacco monopoly, Bulgartabac. The other four potential bidders, who announced their intentions last summer, are UK tobacco giant Imperial Tobacco Group, Korea’s KT&G and British-American Tobacco, together with Altria’s Phillip Morris.”I am pleased with what I heard of the new privatization strategy,” said Gallaher’s Vice President for the Balkans and Central Europe, Guenter Panhoffer. He was referring to the government’s strategy- which we reported on in October and earlier– to sell Bulgartabac factory by factory rather than as a single unit. A previous attempt to privatize the company last April failed because of adherence to the old unitary thinking.

Complementing the purchasing bidders were five companies trying out for the part of privatization consultant: SG Corporate Finance Advisory, Paris; JP Morgan Plc, London; a Credit Suisse First Boston (Europe) consortium, London; Morgan Stanley & Co. Limited, London; and finally UBS Ltd, London, together with Balkan Consultancy Company, Sofia. The field was crystallized on February 2, when a deadline for bidding set in December expired.

Finally, on 17 February, Morgan Stanley was chosen. This was owing to its “…successful record in consulting similar privatisations in neighbouring Serbia,” according to the Bulgarian Ministry of Economy. Unsurprisingly for the Balkans, Bulgartabac’s board of advisers is comprised of the same deciding cabinet ministers.

The ministry plans to get the privatization underway in 3 months, by which time Morgan Stanley will have conducted due diligence at the factories and worked out its privatization strategy. Reuters adds that “…the process is an important condition for Bulgaria’s loans from foreign donors and for credit-rating upgrades.”

Reuters yesterday added that “foreign majors” had “abandoned” the privatization attempts begun last spring, due to the perceived unattractiveness of some of Bulgartabac’s subsidiaries. Besides separate unloading of subsidiaries, the new government plan aims to close loss-making units.

However, strategy was not the only reason for a breakdown in talks. Bulgaria’s politically powerful Turkish minority asserted its interests as well. From our October 2003 report:

“…One of the sticking points in April’s negotiations was the collective fate of tobacco workers under any future owner. Most of the affected workers are Bulgarians of Turkish origin, and their interests have been propelled by Turkish political leaders inside Bulgaria’s ruling coalition.”

Bulgartabac has rich holdings across several countries. All in all, its 22 domestic subsidiaries include 12 processing factories and 9 cigarette factories. It also owns 5 cigarette factories in Russia and one each in Ukraine, Serbia and Romania.

Optimism for Bulgaria’s bid were heightened last summer when three similar privatization sales in Italy, Serbia and Morocco “…fetched prices ranging from double to quadruple original estimates,” in the words of the “Financial Times.” Time will tell if the Bulgarian government can actually get the 300 million euros it anticipated the new strategy would bring it last August. However, the fact that the privatization process is back on track is indeed a reason for optimism.

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