Gradus’ shares, the Sofia stock exchange, and pension funds

Gradus's listing on the stock exchange was managed by Ivan Angelov's son - Angel

Gradus’ shares, the Sofia stock exchange, and pension funds

According to the Sofia-listed company’s prospectus for its 2018 IPO, revenues were much higher in 2017 than in any of the following three years. Seven pension funds are shareholders to this day.

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Gradus's listing on the stock exchange was managed by Ivan Angelov's son - Angel

© Nadezhda Chipeva


A Bulgarian agribusinessman, Svetoslav Ilchovsky, came to Parliament on May 5 to testify before the newly established temporary committee tasked with auditing the rule of GERB party led by Boyko Borissov over the past decade. In his words, he and many major business people had been continually harassed by GERB - the party that won most votes in the April 4 election but failed to form Bulgaria's next government. Mr Ilchovsky filed documents claiming to show that the owner of the largest chicken-producing factory in the country was demanding false invoices and forcing him to sell his grain at half-price in order to be "left in business". That man - Ivan Angelov of Gradus - was openly presenting himself as "the shadow minister of agriculture," according to Mr Ilchovsky.

Following the initial accusations made before members of Parliament by agribusinessman Svetoslav Ilchovski against Gradus co-owner Ivan Angelov, the company's shares suffered a bruising on May 6. The initial decline of about 10% in their price to 1.40 levs (0.7 euro) was partially erased and the last trades were made at 1.46, or 6.4% down. As Ilchovski accused Gradus of manipulating its financial reports, the drop in the stock price was a predictable reaction of stock market speculators to negative information, regardless of whether it is true or not.

According to Ilchovki, he was asked to help Gradus accumulate a fictitious turnover through fake invoices for deals worth about 70 million in 2017 with his own company. The goal was to make Gradus' turnover look bigger than it actually was, so that its shares could be sold to investors at a higher price during the company's IPO in 2018. The poultry producer threatened to answer these allegations by filing lawsuits against Ilchovski for material and immaterial damages.

Whether any of this happened cannot be proven without having the documents at hand. Ilchovski claims that he has handed documents over to the parliamentary committee. However, the committee has yet to decide to make them public, and it's unlikely that it would, considering that the lifespan of that parliament was cut short on May 11 and snap elections were called.

Having said that, some facts can already be discussed.

Whom did Gradus raise money from?

Gradus went public in 2018. Initially, the company offered 55.5 million shares, half of which were new and half belonged to the founders, Angelov brothers Ivan and Luka, with the option to sell another 6.6 million of their shares in case of great interest. The price range was set at 1.80-2.35 levs per share, which could bring in funds of up to 146 million levs in case of maximum interest.

The end result was more modest - 45.2 million shares were subscribed at the minimum price of 1.80 levs. Thus, 81 million levs were raised, half of which went to the company and the other half to the current shareholders. About 1400 institutional and individual investors took part in the IPO, according to the company's reports.

Local pension funds were key, investing a total of 56.34 million levs in Gradus. Funds of seven of the nine licensed pension companies in Bulgaria participated in the IPO. Market leaders Doverie and Allianz invested the largest amounts - 22 million levs and 15 million levs, respectively. All seven pension funds are still shareholders in Gradus, and some have even increased their stakes.

What came next?

The company's shares have traded on the Bulgarian Stock Exchange since the summer of 2018. The price has fluctuated in the range of 1.60-1.80 levs, with only individual deals made at levels above the IPO price. After the start of the pandemic, Gradus' shares fell to levels below 1.40 levs but have since then recovered to about 1.60 levs.

In the IPO, investors were looking at the group's financial results for 2017. The problem is that the enterprise itself was established at the end of November of that year by consolidating six companies. The consolidated report outlines very low revenues because it covers December and a few days in November. The prospectus to the investors gives the individual revenues of the six companies but not the transactions among them, thus showing a sum of 214 million levs in revenues on paper.

According to Ilchovski, the "fictitious" part of revenues represented about a third of turnover at the time. In the next three years, annual revenues ranged between 140 and 160 million levs - significantly lower than the turnover reported at the time of the IPO, audited reports show.

In an official statement on May 10, the independent member of the Board of Directors Georgi Babev stated that three independent appraisers were used in the apportionment in 2017, all reports were certified without remarks by auditors, and turnovers and transactions were checked by the National Revenue Agency (NRA) who had not detected any violations. "All transactions made by these companies are real, registered with the NRA, and reported in accordance with international accounting standards in the financial statements of the group," the company position reads. "As an independent member of the Board of Directors of Gradus, I have assigned the preparation of reports on all transactions with cereals by the group from 2017 to date. The information will be made public," added Babev.

Who cleared Gradus' reports?

The chicken producer's financial statements are audited by Sofia-based accounting and advisory firm Baker Tilly.

The Bulgarian investment market is regulated by the Financial Supervision Commission which approves the IPO prospectus and may request additional information and documents. The FSC definitely has no obligation and capacity to audit the reports of each public company but it should take action in case of doubts raised about a company. Submitting reports with incorrect information could constitute market manipulation and can lead to significant damage to investors.

Are investors worried?

The decline in the price of Gradus shares following Ilchovski's allegations resulted from trades of just 63,189 shares while the company's total capital is divided into 243.6 million shares. Therefore, it is difficult to conclude that Ilchovski's wordsstirred a panic.

Representatives of pension companies, with whom Capital talked informally on the matter, are skeptical of his claims. They do not rule out a hypothetical possibility of financial fraud, especially taking into consideration that Gradus is a holding company while the business is scattered in many subsidiaries. They point out that Gradus' revenues and profits from trade in agricultural produce are not significant, so they can hardly have a significant impact.

Ilchovski's main dealings with the Angelov brothers were made with another company under their control, edible oil producer Biser Oliva, according to unofficial information about their version of the events. Sources say that a forward deal for the purchase of sunflower seed was struck with Ilchovski but he failed to deliver on his commitment after the market price of the commodity rose and this was the reason why his relations with the brothers turned sour.

A Bulgarian agribusinessman, Svetoslav Ilchovsky, came to Parliament on May 5 to testify before the newly established temporary committee tasked with auditing the rule of GERB party led by Boyko Borissov over the past decade. In his words, he and many major business people had been continually harassed by GERB - the party that won most votes in the April 4 election but failed to form Bulgaria's next government. Mr Ilchovsky filed documents claiming to show that the owner of the largest chicken-producing factory in the country was demanding false invoices and forcing him to sell his grain at half-price in order to be "left in business". That man - Ivan Angelov of Gradus - was openly presenting himself as "the shadow minister of agriculture," according to Mr Ilchovsky.

Following the initial accusations made before members of Parliament by agribusinessman Svetoslav Ilchovski against Gradus co-owner Ivan Angelov, the company's shares suffered a bruising on May 6. The initial decline of about 10% in their price to 1.40 levs (0.7 euro) was partially erased and the last trades were made at 1.46, or 6.4% down. As Ilchovski accused Gradus of manipulating its financial reports, the drop in the stock price was a predictable reaction of stock market speculators to negative information, regardless of whether it is true or not.

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