Bakhmatyuk: Agribusiness in Ukraine is ‘least risky’ sector

2011-10-28 11:48:30

Oleg Bakhmatyuk has closed a chicken processing plant in the U.S. that he bought less than a year ago.

He is having a dirty public fight with former managers of VAB, a mid-size Ukrainian bank where he is buying a 67.9 percent share for close to $80 million. The much-hyped initial public offering of his largest company, Ukrlandfarming, has been postponed until the markets turn around.

Yet these look like minor problems on the scale of business of this 36-year-old Ukrainian, whose fortune Forbes valued at $1 billion last year.

He has, in fact, had a good year: the land bank of his flagship company, Ukrlandfarming, grew to be the biggest in Ukraine at 480,000 hectares though a series of acquisitions. He merged this company with London- listed Avangard, giving both corporations a number of market advantages.

He is taking part in his first ever tender in Iraq for exporting 50,000 tons of sugar, and has broken a world record by managing more than 100,000 hectares of farmland in Ukraine, including all tractors and combine harvesters working on it, via satellite.

Yet, sitting at the desk of his Kyiv office behind a pile of market reports and presentations, Bakhmatyuk says he ended up in agriculture almost by accident after the governor of Ivano-Frankivsk Oblast asked him to buy out a dying egg-making plant in the mid-2000s.

Seven years later, he controls about a quarter of the nation’s egg production, breeds cattle, grows a number of cereals and sugar, and is eyeing China and Middle East as major markets for his expanding food production company and potential capital markets for further development.

He says everything is ready for an initial public offering of Ukrlandfarming in spring in both London and Warsaw.

Kyiv Post: After buying Townsend, a poultry processing plant in North Carolina, early this year for nearly $25 million, you closed it down in October. What happened?

Oleg Bakhmatyuk: The poultry business in the U.S. in the last six months has hit the worst crisis in the past 10 years. Over-production caused losses of up to 40 percent. We entered the market at the very beginning of this process, optimized the company, invested about $8 million into CAPEX [capital expenses], and another $6 million into the turnover.

We even achieved small profitability, but then there was a sharp drop, up to 30-40 percent, in the price on chicken breast – and more is coming. So we realized that our decision was correct: To avoid a bankruptcy through losing $7-8 million per month, we made a plan to gradually halt the work of the plant for the next six months.

According to analysts’ predictions, the market is expecting a serious correction – about six big companies are currently undergoing bankruptcy procedures. So, we think that six months from now the market will clear up and we’ll be able to return to regular work. Our company has not gone bankrupt. It had a planned halt of production, and paid out all the salaries, all insurance compensations and is still paying to various funds according to local regulations.
KP: David Purtle, CEO of one of your companies in the U.S., said recently that you didn’t like “the environment in the U.S., and the lack of discipline in the poultry industry.” How does their investment climate compare to ours?

OB: The one thing we noticed in the states is the significant level of regulation. The market itself is very interesting. We entered it dynamically, yet got caught in the wave of overproduction. Nonetheless, we still think the plant and our investment was a good one.

Consumption [of chicken in the U.S.] stands at 15 million tons. Big players like Tyson are withstanding tens of millions in losses, so the market will inevitably face a correction of about 20-25 percent. We entered the market with 1.5 percent of the share. And now those who control 5 or 7 percent are leaving the market.

KP: Have you got plans to buy any new plants in the U.S.? Prices should be good after bankruptcies and crises.

OB: We have been looking – we’re interested in this industry, that’s for sure. Poultry is good for diversification. In the markets of Middle East, which I actively court, it would be interesting to add poultry to sugar, eggs and corn [that we already export].

We’re finding very good offers, extremely good. We have seen that by buying a plant for a good price and by investing into upgrades and turnover, we cut the operational expenses by 20 percent.

To be honest, this is not one of our biggest businesses – we thought we could achieve a profit margin of about 5 to 7 percent, we would have a new product in our sales structure, on top of eggs and egg products and sugar and corn. The more you have to offer, the more interesting you are on the [global] market.

KP: Apart from Townsend, you have been in the news because of the merger of two of your companies: Avangard and Ukrlandfarming. There is a lot of speculation around as to the motives of the merger. What were they?

OB: The first one was formation of a full-scale agricultural company, which includes production of proteins. The synergy is clear for both companies. Avangard will hedge its risk in buying [chicken feed] on the domestic market.

Avangard is a big buyer of forage wheat and corn, about 600,000-700,000 tons of wheat and corn, and another 100-150,000 tons [each] of soy beans and sunflower seeds. Effectively, it consumes close to 1 million tons of chicken feed. Ukrlandfarming gets the same type of hedge: currently is sells both domestically and abroad, so Avangard is a good and large client for it.

As far as benefits for shareholders go for both Avangard and Ukrlandfarming, it was officially announced that in case of an IPO for Ukrlandfarming, the shares of Avangard will be swapped for the shares of Ukrlandfarming.

So, the rights of minority shareholders are extremely important for the [success] of the future IPO: Ukrlandfarming is a much larger company. There have been two separate audits for each of them by KPMG, and we continue preparing Ukrlandfarming for a foreign IPO.

KP: There is also a theory that though this merger you’re protecting Ukrlandfarming from raiders by making it an umbrella for a listed company. Thus, no changes in shareholders would go unnoticed.

OB: I don’t think [a merger] would save you, it’s more like an illusion we create for ourselves. Being public does not affect anything if someone is acting out of political motives. No, this was not one of our primary motives.

KP: Sounds like it wasn’t a primary motive, but could it have been a secondary motive?

OB: My company appeared very recently, it has grown very fast, and I have a lot of friends old and new – some of them don’t like this rapid growth... The problem is that these types of companies are difficult to take over. They’re not metallurgical giants, they’re not oil refineries.

If the people who work here leave, there will be nothing left tomorrow: Our company is about logistics, there is nothing like state monopolies here. You can take it over, but achieve nothing.

KP: But you have a lot of assets – enough for someone to live off it for some time. You have made your first billion, someone else thinks they can make theirs.

OB: Firstly, all these paper assessments of $1 billion, or 2 or 3 – they’re so conventional. The market crashed by half – does that mean the fortune has? I am interested in building infrastructure. How much of it is my personal property does not matter.

What matters is doing an ambitious project in terms of its vision, the approach, the aims for me and my team – this is interesting. Right now, the agrarian sector can be compared to the energy sector in the 1980s, when oil became a political commodity.

Now food is becoming a political commodity. Yet it’s impossible to stick your hand into the ground and pull out a sack of flour – you have to build something first. You have to grow grain, buy a tractor, build an elevator – you have to create a whole logistical chain, and only then do you have a product.

As far as dangers go, they’re always there: on the post-Soviet territory there isn’t a single company that has no political risks. Yet in Ukraine the agribusiness sector is the least risky.

KP: You’re buying VAB Bank, what stage is the deal at?

OB: It’s at the stage of approval of the anti-monopoly committee. We’re expecting a decision soon.

KP: You’re being accused by minority shareholders of the bank of issuing Hr 1 billion worth of insider loans to yourself.

OB: My companies do have some loans from VAB. But these are the same companies that are part of Ukrlandfarming, which recently received $600 million from two top world banks [Deutsche Bank and Sberbank].

Ukrlandfarming, which has 270 legal entities within its structure, works with 32 banks in Ukraine. This includes trading operations, top-ups of turnover cash.

KP: On the scale of credits issued to Ukrlandfarming, what share belongs to VAB?

OB: About 5 percent. The loan portfolio in Aval, for example, is twice the size.

KP: What’s the total value of loans?

OB: This information is confidential, but it hovers around Hr 1 billion. But when we entered the bank, we discovered that [ex-chairman of the Board Sergey] Maximov’s loans [worth around Hr 1 billion] have not been serviced for two years – neither the interest has been paid, nor the principal.

So comparing us to him is like comparing a broken bike with a Mercedes... He is under the impression that we will pay his debts – or at least that’s how he behaves. But it won’t happen – this is the money that has to be paid off as people’s deposits.

Yet this is the most problematic one of the bank’s assets, and today it’s much cheaper for him to pay for a black PR campaign – in the past seven days there were eight articles printed about me. Yet we shall solve this problem. We’re currently actively working with courts and law enforcers, but have zero willingness [on behalf of Maximov] to return to the dialogue.

KP: Why do you need two banks? [Bakhmatyuk owns Finansova Initsiatyva, ranked 28 by assets. VAB is ranked 26.]

OB: The market of retail agrarian loans is extremely attractive. I see a big future here. Nobody has been interested in this market for several reasons, including the absence of any paperwork and proper accountancy.

Yet I think that consumer credits, good as they are, are not less risky than the agrarian sector. The market is getting more structured: There are players emerging with 500-2,000 hectares of land who need resources. In the next five years it will be one of the most promising banking sectors.

The one who comes first to this market will have the most advantages. Yet Finansova Initsiatyva does not have the capacity to do it, while VAB has a good experience in consumer lending and a good pool of people who have local experience in corporate loans. We think that in three years we can be in a top three creditor of the agricultural sector.