Change of Owners at Yuri Gagarin (4PX:BU)

Last Tuesday, March 5, I attended the special shareholders’ meeting of Yuri Gagarin (4PX:BU).  I wrote two articles about the company last year (one and two).  In the second one, I talked about the uneventful special shareholders’ meeting that was held (unlike the previous failed attempt) but nothing was decided.  Now, the meeting was held and the goal was accomplished.

The rumors turned out to be right.  The meetings were about a change of ownership.  But, the time wasn’t yet right back then.  Probably, management didn’t get the message after the passing of the lobbyist law that forced the company to close down its cigarette tubes operations.  Since this nudge was not enough, November and December sales in the Cardboard and Paper Packaging segment saw 40% and 50% MoM declines, respectively.

Yuri Gagarin Sales 2010-2012 (by month)

Usually, 5-7 days after the end of the month, the company publishes the monthly sales numbers.  However, January and February sales have not yet been published.  But on February 21, Yuri Gagarin announced (PDF in Bulgarian) a special distribution agreement.  The special about it was the lack of all detail.

We inform you about an offer to sign a distribution contract received by the Company, which aims to establish lasting trade relationships, achieve quick and material sales growth in the Packaging and Filters segments, distribute of the whole product line for a period of five years, and sustainably develop of the Company.

The board accepted the offer and pledged the Company’s property, plant and equipment in a ~€10m loan from First Investment Bank (FIB) to be used for working capital needs.  FIB is believed to be the bank behind the offshore companies that owned Yuri Gagarin up to now.  Since 1998, the company’s net working capital has averaged €8.5m and has never reached €10m.  The €10m credit “for working capital needs” doesn’t make any sense unless seen as a surety bond to FIB promising that the new owners will play fair and make good on the company debt.

After the sharp decline in sales, point was taken and ownership was transferred.  The two Cyprus offshore companies owning two-thirds of the shares – Baranco (49%) and Comso Tabacco (18%) – were taken over by a Belize and a Seychelles companies.  Effectively, control over Yuri Gagarin was sold for €6.1m, plus assumed liabilities of €13.8m.  The deal is very efficient for the new owners.  Putting in just €6.1m of their own equity, they acquired control of a company valued at over €21m in the market which likely undervalues it.  Year-to-date, the stock price has gone from €14 to €21. has taken a good look at the deal in a long article (available only in Bulgarian).  From it, we learn that the lawyers, who registered the local branches of the new offshore owners, also represent King’s Tobacco – a 2008 privatized spin-off from Bulgartabac, the former Bulgarian tobacco monopoly.  Both companies decline to have anything to do with the Yuri Gagarin deal.

Coincidentally, these are the companies that stand to benefit the most from this last piece of the puzzle in their vertical integration strategy.  Even more coincidentally, King’s Tobacco has almost finished building its new factory right next to Yuri Gagarin’s properties.  In the past few years, King’s has been investing heavily in building its distribution network.  I witnessed this in the number of King’s branded cigarette stores and billboards mushrooming around town (and in towns all over the country).

What remains to be seen is whether Yuri Gagarin will continue as a public company and how the change in ownership will affect profitability (for sales are sure to grow).  The future of the company goes back to being very closely intertwined with the tobacco (sort of) monopoly.  It can go both ways for minority shareholders, depending on management’s decisions.