Analysis: Agriculture becomes sexy again

Deals

The following story, by András Zsámboki, is from the July 4-17 print edition of the Budapest Business Journal.

Agrarian integrators as a topic did not use to arouse too much interest in the media until last year. In 2013, however, the field produced the biggest acquisition of the year in Hungary. Sándor Csányi, Hungary’s number one financial mogul gained an 47% share in KITE, the market-leading company of the area, paying HUF 21 billion for the stake. It took a great deal of legal maneuvering, as László Bige, a fertilizer manufacturer and the second richest person in Hungary, had for a long time seemed likely to be KITE’s winning suitor. And while all of that was going on, a new regional challenger has showed up as well: the Czech billionaire entrepreneur of Slovak origin Andrej Babiš, who in 2012 bought out Hungary’s second largest agrarian integrator firm IKR. 

How come the agrarian integrators’ sector suddenly became so sexy? According to textbook definition, agrarian integrators are firms that organize production and provide financial infrastructure to farmers. “In reality, they provide capital and expertise in countries where farmers lack those assets,” László Hazafi, an agrarian expert who writes for Portfolio explains to the Budapest Business Journal. Such integrators give credit to farmers, the collateral for which is the agrarian produce itself. At the end of the production process, the integrators receive their down payment by buying up the produce at a pre-agreed price. Part of the credit is paid in kind. The integrators provide input materials such as fertilizers, seeds, and pesticides to the farmers; furthermore, they take part in the purchasing of agricultural machinery as well. “In Central and Eastern Europe, the integrator system is a time-tested formation,” Hazafi points out.

Time-tested or not, the crisis shook this market as well. Agrarian integrator firms with high reputations, for example the Szolnok-based GITR, have gone bankrupt by the dozen since 2008. Others, like the Bábolna-based IKR, have been forced to close down entire branches; some companies with larger capital resources had to sell off part of the company. IKR has first lost its exclusive right to sell New Holland combines in Hungary, and on top of that was forced to pay a more than HUF 1 bln fine charged by the Hungarian national revenue authority. IKR had no choice but to sell one of its branches called IKR Agrár to the Czech giant Agrotech Holding. KITE remained the only Hungarian integrator firm that survived the crisis intact and had even strengthened its position by the end. In 2010, KITE’s turnover has almost doubled and reached HUF 205 bln in 2013. That year, the company’s income after taxes was HUF 3.7 bln.

The doer, the challenger and the wannabe

“It is obvious that an enormous degree of concentration has taken place in the Hungarian plant cultivation sector, the apparent beneficiary of which has become KITE,” Hazafi sums up. Everybody tried to take advantage of this situation in a different way: one firm wanted to acquire KITE; another wanted to enlarge its input material production network into an integrator-type of enterprise; a third wished to secure its position as a single brand retailer; and there was one that wanted to expand its integrative activities in Slovakia and the Czech Republic into Hungary.

“In order to enter the market at all, one needs to possess HUF 10 bln as a minimum capital; and if one wishes to buy a decisive market stake one needs to have even more than that,” Hazafi remarks. Given these conditions, it is not surprising that only billionaires play this game. The first suitor was László Bige, who as owner of the Várpalota-based Nitrogénművek Zrt. is the second richest person in Hungary. Importantly, as a manufacturer of fertilizers, he has a 75% market share in that field. He made his bid for KITE early in 2012. “By wishing to buy out KITE, Bige obviously wanted to build up a vertical industry. Out of an input material manufacturer, he wished to become the protagonist of the agrarian integrators’ sector,” Hazafi suggests.

Another suitor showed up in 2013, but did not reveal his identity at first: Sándor Csányi, Hungary’s richest person, who is known to have interests in agriculture as well. He owns Bonafarm Holding, an enterprise that ranges from animal farming to corn growing and supports the meat processing industry. The two flagship companies of his holding are the Herz and Pick Salami Factories. “Sándor Csányi’s concerns are strongest in animal farming. In acquiring KITE, his aim was to strengthen his position in other fields of plant cultivation, namely in horticulture and corn producing,” Hazafi explains. 

Csányi had good reasons to be secretive about his acquisition plans: he wanted to avoid creating a bidding war between Bige and himself. An extreme price hike was likely to occur, since both men are known to have ample resources. KITE initially agreed with Nitrogénművek Zrt. that it would buy a 52% stake owned by the company’s employees and management for 18 times its book value – which was indeed a lucrative offer. At the last moment, however, Csányi offered a price 20 times the book value. That was the reason why Csányi kept his identity secret and made his offer through a figurehead. “Had he revealed his identity and the names of both competing bidders had leaked out, the price competition would have got way out of hand,” Hazafi notes.

Csányi may have had another reason not to reveal his name as a suitor. He may have been worried about the Hungarian state interfering with the process in order to stop him from gaining ground in plant cultivation. “As soon as Csányi’s bid was disclosed the agrarian platform of Fidesz raised the idea that the whole agrarian integrators’ market should be nationalized,” a source wishing to remain anonymous told the BBJ. Rumor says that one leading agricultural politician commented on the events by saying that agrarian integration is too much of good a business for the Hungarian state to be left out of it. However, that idea went through a great deal of refinement before it landed with the relevant parliamentary committee, potentially waiting to become a bill. In October last year, Sándor Font, the governing Fidesz party chairman of Parliament’s Agricultural Committee announced that the state wished to create non-profit agrarian integrator centers in order to contribute to the improvement of farmers’ situation. “Farmers could then decide whether they wish to rely on non-profit, state-owned integrators’ services, or stick to today’s for-profit agrarian integrator firms, the activities of which would not be abolished,” Font told online news magazine Agrárszektor.hu. 

Later, however, the planned bill on agrarian integration was taken off of Parliament’s agenda because of the forthcoming elections, and Csányi’s way was cleared to become KITE’s owner in his full right.

The battle is over, the war goes on

In the meantime, rejected suitor László Bige has not given up his market ambitions. Nitrogénművek’s management is working hard on intensely developing its input material production alongside its original fertilizer manufacturing profile; in addition, it may even become retailer of various agricultural machinery brands. The apparent ambition is still to enter the agrarian integrators’ market eventually. “For the sake of the complex marketing of input materials, this year and next year we are going to invest €300 mln into that field. We wish to extend our Genezis Partner Network, which at this point distributes only fertilizers, into a chain that offers a broader selection of goods,” Péter Suba, deputy managing director of Nitrogénművek told the BBJ. The company already has a three-quarter share in the fertilizer market, and within two years it would like to achieve a 25% share in the seeds market. Bige wishes to reach this aim by limiting his sales to agrarian integrators, and selling fertilizers directly to farmers on his own. Sándor Buvár, managing director of KITE, has confirmed this news. “The relationship between László Bige and KITE was already tense at the time of KITE’s planned sale. Since the acquisition was completed, László Bige has sold only a minimal amount of fertilizers to KITE,” Sándor Búvár told the BBJ.

It would be a mistake, however, to believe that KITE is Bige’s main enemy, experts point out. Nitrogénművek’s natural competitor is actually the Czech company Agrotech. “Both companies possess substantial capacities in fertilizer production and, based on that, are striving to market other input materials, and offer financial services to farmers,” Hazafi explains to the BBJ. In the past 20 years, most of the fertilizer factories have closed down in the Central European region, and only a few large ones remain. Of those, the only Hungarian producer is Nitrogénművek; another factory called DUSLO operates at Sala (Vágsellye) in Slovakia. DUSLO is owned by Andrej Babiš, and his firm  routinely plucks customers from Nitrogénművek. The two firm’s combined capacity practically covers regional demand; between March and June, when seasonal demand is high, even shortages may occur. This is a situation in which it is rather easy to motivate farmers to join the partner networks of large fertilizer producers. “The market status quo is dissolving at the moment, and we would like to take advantage of the financial opportunities offered by our mother company Agrotech,” says Lajos Nagy, managing director of IKR Agrár. 

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