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On Hungary’s ailing home improvement market

From the Budapest Business Journal print edition: Hungarian-owned MPF Holding is considering buying and recapitalizing the Hungarian subsidiary of German DIY retail chain Praktiker jointly with a Chinese investor, Zsolt Felcsúti, majority owner of the holding announced on November 20 this year. The purchase would concern all the Praktiker stores in Hungary, meaning 19 giant and two small retail outlets. Furthermore, MPF Holding said it would continue to employ the 1,200 employees presently working for Praktiker’s Hungarian subsidiary.

It is not yet certain, however, that MPF will indeed buy Pratiker’s Hungarian retail chain network. “The financial experts of MPF are currently working on the auditing of Praktiker. The conclusion of the deal, however, depends on the trustee responsible for the liquidation of the German parent company,” Zsolt Felcsuti, owner and CEO of MPF Holding said.

According to Hungarian political daily Népszabadság, a number of German competitors are also showing interest in Praktiker’s Eastern European network of DIY stores. “MPF’s bid, however, is probably the most generous of all, provided the trustee in bankruptcy is not planning to sell the entire Eastern European network of subsidiaries in one piece,” a source wishing to remain anonymous informed the Budapest Business Journal.  

Praktiker operates a total of 400 stores in 10 countries. Its attractive size is, however, overshadowed by the fact that the company has been suffering continual losses in recent years. Compared to 2011 when the company could boast a €555 million profit, last year the company produced a €189 million deficit. In the same period, turnover dropped by 10% to €3 billion.

DIY market in trouble
What exactly is wrong with Praktiker? How can it be possible that a mid-size Hungarian company with moderate resources hurries to the rescue of the German giant? The BBJ’s investigations suggest that it is not only Praktiker that is experiencing a hard time, but the whole DIY market in general. It is exactly this retail segment that has suffered the biggest losses caused by the 2008 crisis, and this is especially so in Eastern Europe.

“Aside from the car and electronic appliances markets, it is the home improvement retail market that has shrunk to the greatest extent since 2008. Hungary, Romania, Bulgaria and Ukraine have been particularly hard hit,” a DIY expert wishing to remain anonymous told the BBJ.

Turnover of construction materials and home improvement items plummeted by 25% between 2007 and 2012, according to the Central Statistics Office (KSH). With the rate of inflation taken into account, the extent of the decrease would exceed 40%.

DIY retail chains in Hungary have all been loss-making in recent years, and Bricostore pulled out of Hungary last year. The after-tax losses at Baumax were even higher than Praktiker’s last year; OBI’s operating cash flow was somewhat better that Praktiker’s, but it too has been suffered.

Confused escape strategies
“Bricostore used to target the upper segment of the DIY retail market. After the crisis broke, this proved to be a particular disadvantage in Eastern Europe,” the aforementioned source told BBJ. What made Bricostore’s situation hopeless, however, was the fact that its retail units, most of which were owned by the company itself, were bought with bank loans, and the company was therefore burdened by significant amounts of debt. During the crisis years, these stores were unable to produce enough operating cash flow to cover the repayment of their loans.

“The Hungarian subsidiary of Praktiker is better off in this respect: it has a middle category price range, and it rents, rather than owns, 16 out of its 19 large stores,” added our DIY expert. The 30% decrease of turnover compared to 2008 has made reorganization necessary.

According to the Financial Times Deutschland, Praktiker’s major shareholder the Maseltov Fund suggested that Praktiker AG, which concentrates all the stores operating in Germany, should be strengthened with the help of the revenue derived from selling the Eastern European network of stores. “Selling our subsidiaries in Romania, Bulgaria, Albania, Greece, and Hungary could bring Praktiker €50-70 million,” Isabelle de Krassny, fund manager of Maseltov Fund told the FTD in March 2012.

Later developments, however, suggest that this concept has been replaced by a different strategy. Praktiker Magyarország was recapitalized with HUF 2.2 billion, which even made it possible to open further two smaller (less than 1,000 sqm) stores. But as the result of the recapitalization of some of its Eastern European subsidiaries, the German-based parent company itself went bankrupt.

OBI and Baumax have both followed a different strategy. In both cases, the parent companies backed their Eastern European subsidiaries with intra-corporation loans. “At the moment, Baumax and OBI seem to be the two big beneficiaries of the bankruptcy wave that swept through the DIY market. It is rather telling, however, that neither OBI nor Baumax has bought a single store from Bricostore’s network,” the BBJ’s source commented.

The suitor
According to political daily Népszabadság, MPF Holding is planning to invest €10 million (HUF 3 billion) into the Hungarian element of the Praktiker home improvement chain. The sale of Bricostore’s 15 Romanian stores this past spring may serve as a reference deal. Those stores together produced a €131 million turnover in 2012 – in comparison, last year’s turnover at Praktiker Magyarország was €100 million. According to the Bloomberg news agency, Kingsfisher paid €75 million to the Bresson family, owners of Bricostore; compared to that, the €12 million offered by MPF for Praktiker Magyarország is peanuts.

However, the difference between the two DIY chains’ ownership structures explains Bricostore’s higher value. Bricostore Romania was the owner of 10 of its 15 stores. In contrast, Praktiker Magyarország owns only three of the 21 stores operating in Hungary. As a matter of fact, MPF Holding did also make a bid for the nine Hungarian Bricostores in spring 2012, but the Bresson family rejected their offer.  

MPF Holding is one of those rare cases among mid-size Hungarian companies of a family enterprise that is currently being managed by the second generation. Present CEO Zsolt Felcsúti’s father founded the company in the 1980s, prior to the political transition. After 1990, the firm began to grow organically. Zsolt Felcsuti took over management in 2000, then acquired FÉG, a gas heater and boiler manufacturer, as well as Widenta, a company noted for its production of emery machines. After that, he started to build an extensive international retail network that covers huge territories from Singapore and China through Romania and Germany to the United States.

Today, “We receive only about 40% of our revenue from marketing self-manufactured products,” said Felcsuti. “The remaining 60% is produced from selling the products of other companies. It’s not worth the trouble trying to manufacture things at home in Hungary if they can be manufactured cheaper elsewhere.”