Boston, MA -- (SBWIRE) -- 04/09/2014 -- With Slovenian economy to remain in recession throughout 2014, we do not envisage a major positive shift in private spending. Elevated unemployment levels and benefit cuts will continue to weigh down discretionary spending, with prices of certain goods rising following the mid-2013 implementation of higher value-added tax (VAT) rates.

Headline Industry Data

- Food consumption (local currency) growth (y-o-y) in 2014: +0.2%; compound annual growth rate (CAGR) to 2018: +0.1%
- Per capita food consumption (local currency) growth (y-o-y) in 2014: -0.0%; CAGR to 2018: +0.8%
- Alcoholic drinks value (local currency) sales growth (y-o-y) in 2014: +1.2%; compound annual growth rate (CAGR) to 2018: +1.9%
- Soft drinks value (local currency) sales growth (y-o-y) in 2014: +1.8%; CAGR to 2018: +2.8%
- Total mass grocery retail value (local currency) sales growth (y-o-y) in 2014: +2.6%; compound annual growth rate (CAGR) to 2018: +4.2%

Key Company Trends

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Agrokor Closing In On Mercator Purchase: Slovenia's food retailers have been largely unable to avoid the severe challenges faced by so many food and drink companies operating in the Balkan region. Slovenia's leading food retailer Mercator, which has a strong presence in the Balkans, saw its share price decline by nearly 70% between late 2011 and late 2013. This was a company with seemingly exciting prospects in the region, as it expanded beyond its core domestic base into markets such as Croatia and Serbia. Organised retail here was still fairly underdeveloped, and the opportunities on offer, while exciting for a regional retailer like Mercator, were not quite on a large enough scale to attract the likes of UK-based Tesco and France-based Carrefour.

After being paired with Agrokor, a Croatian food and drink giant and the country's largest private company, a deal was agreed in principle in June 2013 that Agrokor would buy Mercator for EUR240mn. Negotiations are still believed to be taking place as the two companies look to agree on a final price. Mercator's shares have sold off further since the initial agreement, so Agrokor may have revised its valuation of a business that has lost an enormous amount of value over the past few years. Mercator's shares traded at a price/book ratio above 2x before the global financial crisis in 2007; they are now trading well below book value per share at 0.4x.

However, from a long-term outlook, Mercator's international business is what makes it appealing. The proportional contribution of Slovenia to group sales declined from more than 80% in 2005 to 58% in 2011 (last available year-end data via Bloomberg), while the combined share of Serbia and Croatia was around one-third of the sales base. These two markets accounted for nearly 60% of capital expenditure in 2011, underscoring the focus of the company's expansion.

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