Tycoon’s Balkan Empire Unravels in 60 Days of Market Panic

Updated on
  • Agrokor lender Sberbank demands Todoric cede control
  • Russian bank set condition for rescuing the ailing retailer

It took Ivica Todoric 41 years to build an empire that now accounts for almost a sixth of Croatia’s economy.

But two months of market panic were all that were needed for his main creditor, a Russian bank run by a longtime ally of Vladimir Putin, to decide that it’s time for him to go.

The unraveling of the sprawling food maker and retailer that Todoric runs like a family business, Agrokor d.d., is a classic tale of undisciplined borrowing in a developing market. It’s also become an affair of state, with the Kremlin’s largest lender, Sberbank PJSC, now holding sway over the fate of the largest enterprise in a country with membership in both the European Union and NATO.

The alarm was sounded most loudly in January, when Agrokor announced it couldn’t borrow on attractive terms, triggering a fire sale by bondholders who were already leery of Todoric’s ability to meet 5.7 billion euros ($6.2 billion) of obligations to investors and suppliers.

“It all unraveled very quickly,” said Lutz Roehmeyer, a fund manager at Landesbank Berlin Investment GmbH, who holds Agrokor bonds. “Todoric missed several opportunities to put the company on a sounder financial footing. Sberbank had to move in to keep the company running.”

Sberbank rushed to safeguard its billion-euro investment, offering Todoric help in paying off some of the producers who fill his supermarkets. But now, after the depths of Agrokor’s problems are starting to become clearer, Sberbank is demanding Todoric’s ouster as a condition for any rescue.

Read more: Agrokor’s fight to survive, explained

The Moscow-based bank’s intentions have been a matter of concern in Croatia, which has angered the Kremlin by voting for EU sanctions over Putin’s actions in Ukraine and for its tense relationship with Serbia, Russia’s closest ally in the region. Agrokor is not only the largest employer in a country of 4.2 million people, it’s also the biggest owner of farmland.

Russian Threat

Putin’s envoy in Zagreb seemed to confirm investor fears of Russian meddling across Europe when he took the unusual step last month of publicly warning Agrokor over its debt to Sberbank and its smaller state-run rival, VTB Bank PJSC, the Croatian company’s second-biggest creditor.

“We’re interested in helping companies that actively cooperate,” the envoy, Anvar Azimov, told reporters. “Agrokor isn’t one of those companies.”

Sberbank’s chief, Herman Gref, on Tuesday took the equally unusual step of criticizing a sitting ambassador in public, saying Azimov’s comments were “unacceptable,” particularly because they caused “serious fluctuations in the market.” Gref, a former economy minister, also took pains to deny reports he wants to “take advantage” of Sberbank’s position as Agrokor’s biggest creditor to “capture” the company, calling them products of “sick” minds.

‘Business Is Business’

On Thursday, the Foreign Ministry in Moscow issued a statement saying that Russia supports strengthening ties with Croatian companies, including Agrokor, and that the ambassador’s remarks had been misunderstood.

Alexander Pivovarenko, a Balkans specialist at the Institute of Slavic Studies in Moscow, said Sberbank is in an awkward position because Russia is constantly accused of “trying to undermine” the region through its investments.  “The reality is that business is business and politics is politics,” he said.

Croatia’s government appears to be taking Gref at his word, supporting efforts to salvage a company with some $7 billion in annual revenue, legions of suppliers and 60,000 workers, even at the risk of allowing Sberbank greater influence over the economy.

A spokeswoman for Agrokor and Todoric didn’t return calls and emails seeking comment on management of the company and talks with creditors. A representative for the Croatian government declined to comment on the talks or on the role of Russian banks.

Private Castle

Todoric, 66, started Agrokor as a flower business in 1976, when former Yugoslavia’s communist regime started introducing pro-market reforms. He pounced on the opportunities created by Croatia’s independence in 1991 to expand into food and retail, buying up everything from land to newspaper kiosks and turning Agrokor into a multinational conglomerate with assets in Serbia and other former Yugoslav republics.

All the while, Todoric kept Agrokor under family control, appointing his three adult children and other relations to key positions. He has his own castle, Kulmer, a historic property perched in the mountains overlooking Zagreb, which is home to the whole clan.

Todoric expanded his corporate empire with debt and refused to sell any part of his 95 percent stake, despite working with Rothschild to prepare an initial public offering in 2016. Another geopolitical shift, Croatia’s entry into the EU in 2013, proved less promising for Agrokor, whose Konzum supermarkets suddenly faced increased competition from larger German and Dutch chains.

The tipping point may have come in 2014, when Todoric bought Mercator Poslovni Sistem, a struggling retailer based in neighboring Slovenia, in a deal valued at 1.3 billion euros. Taking advantage of buoyant markets, he financed the acquisition with more debt, including 485 million euros of risky loans that allow interest to be paid only at maturity.

Bad Bet

That bet is now coming back to bite him.

“The acquisition of Mercator was a stretch,” said Andrew Carrie, an analyst at Stifel Nicolaus in London.

Mercator failed to generate the profits Agrokor expected, Carrie said. The loans backing the deal, which were quoted at above 80 cents on the euro at the beginning of the year, have plunged to about 20 cents, according to data compiled by Bloomberg. Canada Pension Plan Investment Board and Invesco Ltd. are among the biggest holders of the debt, people familiar with the matter said Monday.

Agrokor’s 300 million euros of senior bonds due May 2019 have lost more than a third of their value since the beginning of the year, and are now quoted at 63 cents on the euro, the data show.

“It’s similar to a bank run,” said Aleksej Gren, a fixed-income analyst at Exotix Partners in London. “Suppliers got worried the company was in trouble and asked for immediate payments, exacerbating the liquidity problem.”

Building Influence

As the fight to save Todoric’s business rages on, the next battle -- over how to restructure Agrokor’s debt -- is about to begin.

With Sberbank insisting that Todoric relinquish his hold over a linchpin of Croatian commerce, one of the richest men in the country may have to watch events unfold from the sidelines. But there may be an upside to the crisis he created -- at least for Russia, according to Roehmeyer of Landesbank Berlin.

“Sberbank’s further involvement in Agrokor is a win-win both for Russia and Croatia,” he said. “Sberbank protects its investment and Russia builds influence in a country where it has little ties, while Croatia gets to save its largest private company and employer.’’

— With assistance by Anna Baraulina, Gordana Filipovic, and Henry Meyer

    Before it's here, it's on the Bloomberg Terminal.