Slovenia remains one of the most developed Central and Eastern European economies to have joined the EU and eurozone, but with the euro eroding its export competitiveness, a downturn in Slovenia’s economic fortunes has reawakened the debate over how open the country should be to foreign direct investment.
Historically, the country has sought to prevent foreign takeovers in its corporate and financial sector. As a result, annual FDI flows in Slovenia have averaged between 2% and 4% of GDP since independence in 1991. Many of the country’s biggest banks and corporates have remained in domestic hands, in stark contrast to other countries in CEE.
However, Slovenian firms are being forced to turn to foreign buyouts. New Europe-wide demands for higher bank capital have come just as the Slovenian sovereign is less able to recapitalize its banking champions, particularly NLB, the biggest bank, and Nova Kreditna, the second biggest – both majority state-owned.
The EU has also expressed competition concerns at the level of support Slovenia has afforded local corporations.
Swaps for debt
The global financial crisis of 2008 hit Slovenia hard, meaning local banks have ended up owning large stakes in some of the biggest local companies as a result of debt-for-equity swaps. Meanwhile, the three main ratings agencies downgraded Slovenia’s sovereign rating this autumn, amid constrained finances at the state level.
The downgrades have helped cut off funding possibilities for state-owned local banks. The Slovenian government provided NLB with almost the entirety of a €250 million capital increase in March and the state is estimated to have supported NLB by around €1.5 billion during the past 20 years.
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| NLB’s NPL ratio |
NLB performed relatively poorly in the latest financial stress-test conducted by the European Central Bank in July. It suffered a €183.4 million net loss in 2010. NLB had a non-performing loan ratio of 16.5% at the end of last year, mainly thanks to problems in the local corporate sector. Subsequently, in September, an NLB-led consortium of owners opened bids for a controlling 52.13% stake in the flagship local supermarket chain Mercator. Croatian conglomerate Agrokor, owned by local tycoon Ivica Todoric, soon entered exclusive talks. Observers believe Agrokor is close to clinching the deal, after bidding €221 a share for a holding that would cost it an initial €832 million.
However, Slovenia’s government lost a vote of no confidence in September. And last month, exclusive talks with Agrokor were extended until the end of the year, as parliamentary elections scheduled for early December stymied the politically charged negotiations.
The deal has hit a nerve in Slovenia, partly due to historical rivalries with Croatia.
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| Ante Todoric, vice-president for retail at Agrokor, leads the latest in a line of firms from the former Yugoslavia looking at acquisitions in Slovenia |
Agrokor owns Croatia’s largest retailer Konzum, so Mercator could be a natural fit, but many in Slovenia fear Agrokor’s takeover would endanger Slovenia’s agriculture and food production sector, which employs roughly 100,000 of the country’s 2 million-strong population. Mercator buys more than a third of Slovenian-produced food. Agrokor, as part of the bid, has sought to mollify resistance to its takeover by assuring existing Slovenian suppliers that it will not impose new terms and conditions on existing contracts with Mercator for at least three years. Slovenian producers could also benefit if Konzum opened its shelves to their products, especially given Agrokor’s network elsewhere in the former Yugoslavia.
However, Agrokor is the latest in a line of corporates from that region that have made recent acquisitions in Slovenia. Such transactions include the €382 million takeover of food outfit Droga Kolinska by Croatia’s Atlantic Grupa in 2010, and the €50 million acquisition this year of juice-maker Fructal by its Serbian peer Nectar. These are, respectively, the largest takeovers by Croatian and Serbian firms in Slovenia to date.
Public tender
If Agrokor’s bid is successful, under Slovenian M&A legislation it would have to launch a public tender to buy out the remaining stakeholders and assume any outstanding debt owed by Mercator. This would take the cost of the takeover into the €2 billion territory – comfortably the biggest M&A transaction within the former Yugoslavia to date.
The sheer size of the takeover could lower the political barriers to other foreign acquisitions in Slovenia. White-goods manufacturer Gorenje and fuel retailer Petrol might be the target for future acquisitions.
Now NLB is hoping investors will provide it with at least €400 million as part of a new recapitalization to increase its tier-1 capital ratio to 9.5% (the state-led recapitalization in March left it with a tier-1 capital ratio of 7.8%). Belgian banking group KBC already has a 25% plus one share blocking minority stake in NLB.
With eurozone banks less open to capital expenditure in CEE, and continued aversion to foreign takeovers within Slovenia, one banker believes the ultimate answer could be to move towards a majority equity listing and a more business-oriented management.
However, the EBRD and the IFC are also thought to have considered helping out NLB. Both lenders have provided financial backing to Agrokor’s bid for Mercator.
