The Rapid Demise of Bulgartabac

In April 2017 Bulgartabac sold its brands and distribution network to British American Tobacco (BAT). Just before Christmas of 2017 the remaining 400 employees of Blagoevgrad BT, which operates the holding company's cigarette factory in the city in southwestern Bulgaria, were encouraged to leave and receive compensation. 240 of them agreed. Pleven BT, the holding's tobacco factory in the village of Yasen, is down to only 12 employees as of of January. The holding's cigarette factory in Sofia was closed in 2016; a real estate project is being developed at its site. Staffing levels remain constant only at the company's facility in Plovdiv - the Yuri Gagarin factory, producing filter packaging and filters for clients other than Bulgartabac. According to Capital newspaper, only 20 employees remain at work at the headquarters of the cigarette holding company in Sofia.

This demise occurred despite the assurances of the former government under whose watch the privatization occurred - a government headed, like the present one, by Boyko Borissov -that the chosen buyer, BT Invest, a special purpose vehicle, registered in Austria and having no previous business history, would safeguard Bulgartabac's future better than interested bidders, including global players South Korea's КТ&G Corporation or BAT.

The sale and the fate of Bulgartabac serves as a case study in Bulgaria's politically-linked privatization of state enterprises over the years - a process that has served the interests of of well-connected business raiders and that has ruined once-thriving sectors and enterprises, driven away potential foreign investors, and in the case of Bulgartabac left hundreds unemployed and with dim prospects for future employment.

Custom-made privatization process

Bulgartabac was sold in 2011 to BT Invest. Even thought their participation was hidden behind long line of offshore companies, it was an open secret that the real owners are Tsvetan Vassilev and Delyan Peevski, close business associates at the time. Mr. Vassilev owned the now defunct Corporate Commercial Bank (Corpbank), while Mr. Peevski was member of parliament from the Movement for Rights and Freedoms (DPS), a party that was formally in opposition to the center-right government of Mr. Borissov, but controlled vast media empire.

Still, with the exception of members of the Bulgarian Socialist Party, who publicly pointed to the real buyers, political players led by the ruling GERB party repeated the mantra that the national interest was protected despite the unknown identity of the buyer and the lack of safeguards for the fate of Bulgartabac holding.

For a company such as BT Invest, one without any business history, to succeed against КТ&G and BAT who initially showed interests in privatizing Bulgartabac, the government required that the buyer to guarantee local tobacco growers to buy their production. BAT and КТ&G both found the requirement unreasonable and withdrew from the race, leaving BT Invest without competitors. The Austrian-registered firm could have promised anything, because, as it now appears, it had no intention to deliver on its pledges.

Three years later, as a result of a business divorce between Mr. Vassilev and Mr. Peevski, Bulgartabac remained under the control of Mr. Peevski, who also had an official minority shareholding for a short period of time - a matter seeming to confirm rumors about the real ownership of Bulgartabac. Three more years passed, Bulgartabac's cigarette brands and distribution system were sold, despite their leading positions in the domestic market ), and the company's factories are now all but closed.

What did Peevski get?

The mysterious buyer of Bulgartabac paid 100 million euro, while the cash balance of Bulgartabac Holding stood at 114 million levs at the time. The company had purchased new machines and spare parts for production and had a vast amount of raw materials in stock. It also had a market share of approximately 35% and annual sales of 367 million levs. In addition to its market leadership in Bulgaria, it had long-established distribution channels throughout southeast Europe and the Middle East.

The real value of Bulgartabac following its privatization is hard to assess . The holding company revised its subsidiary holdings a number of times, taking over entities with nothing to do with cigarette trade, including home appliances retailer Technomarket. At the same time, the holding group amassed real estate assets without transparency and for unclear prices. A distribution company was set external to the holding at an unclear cost and then was dropped as part of the deal with BAT. A retail chain has also been created with institutional support from the government which briefly discussed to restrict tobacco sales to special purpose retailers only.

Years of counter-growth

After privatization, Bulgartabac's revenue growth was initially impressive. n 2014, for example, it reached 510 million levs. The company reports from that time mention that about 85% of revenue was generated from sales in the Middle East. At the same time, Bulgartabac was regularly mentioned by the Turkish security services as the largest producer of most brands of smuggled cigarettes entering Turkey through Iraqi Kurdistan. There were suspiciousness that part of the proceeded ended up in the hands of the Kurdish separatists in Turkey. A report of the Turkey's official anti-organized-crime agency,made public in 2015, described Ankara's frustration with the Bulgarian government's apparent support for Bulgartabac.

Following the privatization, the holding's domestic market share began to dwindle. although the company remained market leader, of its share of the domestic market had dropped to 25.8% by 2017. As early as 2011, Victory, the best-selling brand of Bulgartabac in Bulgaria, lost its leading position to Greece's Karelia and has failed to recover it since. By 2017, Victory dropped to third-place behind Marlboro.

Bulgartabac's domestic decline took place despite a complete overhaul of excise tax regulations by GERB in 2016, designed to provide the company's cigarettes a cost advantage to enable it to compete against foreign brands. In addition, the government presented domestic cigarette producers with a valuable favor: they were not obliged to introduce fiscal countering machines for the cigarettes manufactured by their factories, even though there was much suspicion that this enabled to produce more and declare less thus evading excise taxes.

In addition to an absence of controls and the obvious assistance, as described above, provided to Bulgartabac by the the country's Finance Ministry and Parliament, Bulgaria's Commission for Protection of Competition turned a blind eye to shenanigans involving the Bulgartabac's real estate property. In addition, the Financial Supervision Commission did not punish persistent non-disclosures of information and various violations against the minority shareholders. At the same time, the prosecutor's office and security services remained deaf to Turkey's ongoing protests concerning the smuggling of Bulgartabac-owned brands of cigarettes into the country. Most striking, the Bulgaria's privatization agency seems not to notice the unfulfilled commitment of the buyer under the privatization contract to keep the Bulgartabac's factories running for a term of ten years following date of sale.

Following the bankruptcy of Corpbank in 2014, the main creditor of Bulgartabac, the company obtained loans from the state-owned Bulgarian Development Bank, which should, as a rule, support small and medium-sized enterprises and not major ones. Bulgartabac's subsidiaries also took out loans.

Last year, Bulgartabac received another legislative gift, one which former employees claim to have been introduced to enable quick layoffs and which indeed enabled Bulgartabac to slash its payrolls in time for Christmas. The amendments to the State Social Security Budget Act included a clause stipulating that those who agree to leave their jobs by the end of 2017 citing employer's fault, will receive between 4 and 10 times their salaries as a golden handshake. But if they do it afterwards, they will be able to receive just four minimum wage. Thanks to this lever introduced around Christmas Bulgartabac has been able to discharge quickly most of its workers.

The beginning of the end

Despite all the support rendered by the government, Bulgartabac's cigarette factory in Sofia was closed in April 2016 and more than 400 employees were dismissed. At the same time, the revenues of the factory in Pleven, which prepares the tobacco for cigarette production, dropped by half.

In 2017, Bulgartabac, without of the approval of the general assembly of its shareholders, sold the rights to its cigarette brands and their manufacture, the company's most valuable assets, to British American Tobacco for a higher price than was paid for the company when it was privatized back in 2011.

According to the few details of the deal that were disclosed, BATs signed a contract for the right to produce the purchased brands at Blagoevgrad BT for up to two years, i.e. by April 2019 at the latest. Since the beginning of this year, however, the Blagoevgrad factory has less than 200 employees, according to data received from the trade unions. BAT has sufficient capacity elsewhere in the region to produce the former Bulgartabac brands.