Mercator Loss Narrows on Cost Cuts as Revenue Declines

Mercator Poslovni Sistem d.d., the Slovenian retailer due to be sold to Croatia’s Agrokor d.d., narrowed its first-half loss on lower operating costs as the recession in the region continued to hurt sales.

Its loss shrank to 15 million euros ($20 million) from 19 million euros a year earlier, the Ljubljana-based company said in a regulatory statement today. Revenue dropped 3.3 percent to 1.4 billion euros, with the biggest decline in Croatia. Serbia saw an increase in revenue of 4.2 percent.

“Lower revenue is in particular a result of slow economic activity and lower sale of seasonal products due to uncharacteristic weather during the first months of this year’s spring,” the company said. Sales were also hurt by a withdrawal from Bulgaria and Albania and the closing of some units, it said. It cut operating costs by 18.6 million euros.

Mercator, the biggest retail chain in the Balkans, is getting out of markets in the region where it expanded before the financial and economic crisis hit in 2008. Its owners, Slovenian banks and drink maker Pivovarna Lasko d.d., agreed to sell a 53 percent stake of the retailer to Agrokor in June for 240 million euros, or 120 euros a share.

Mercator shares declined 2 euros, or 2 percent, to 101.50 euros at 12:13 p.m. in Ljubljana, giving the company a market value of 380 million euros, data compiled by Bloomberg shows. The stock has declined 11.4 percent from the start of the year.

Debt Reduction

The company wants to reach a debt restructuring deal with its creditor banks, mostly foreign-owned, by the end of the year to reduce 990 million euros of debt, Toni Balazic, the chief executive officer said today in Ljubljana. Lenders are awaiting the impact of the Agrokor takeover on Mercator before the debt agreement, he said.

Slovenia’s economy will only recover in 2015, according to the government’s economic institute, after shrinking an annual 4.8 percent in the first quarter.

Croatia’s gross domestic product will contract 1 percent this year and grow 0.2 percent in 2014, according to the European Commission. By comparison, Serbia should grow between 1.5 percent and 2.5 percent this year and next, Moody’s Investors Service said on Aug. 26.

Agrokor will secure financing for the Mercator purchase “because it’s a good deal,” company President Ivica Todoric said in June. The Croatian company will boost capital and may offer Mercator shares in a public offering by the start of next year, he said.

Acquisition Cost

The transaction cost, split between the group of sellers and Mercator, is “well below” 1 million euros, Balazic said today.

“All stakeholders involved in the transaction will strive to close the acquisition as a failed deal would put enormous pressure on Mercator’s debt and a major capital injection would have to follow,” Andraz Grahek, managing partner at Capital Genetics in Ljubljana said in an e-mail. “Completing the transaction is the only way that makes sense, because it unlocks synergies, especially in Croatia, which has been a never ending nightmare for Mercator’s operations.”

(Updates with CEO comment from sixth paragraph, adds analyst comment in 10th.)
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