Pursuant to the Rules and Regulations of the Ljubljana Stock Exchange, d.d, and the relevant legislation, the company Poslovni sistem Mercator, d.d., hereby informs the shareholders and the public of the following:

Economic conditions

As a result of increasingly harsh conditions in the global financial markets and their effects on the economy in the second half of 2011, the business environment grew more exacting and challenging than expected. This bore a negative impact on the Mercator Group performance from the third quarter forward. After a strenuous third quarter of 2011, the fourth quarter saw business conditions become even more hostile. According to current forecasts, such economic circumstances will persist virtually throughout the Southeastern European region, presumably for the entire 2012. This calls for appropriate measures to counter the crisis, but also inevitably affects the business performance. Thus, we expect the trends from the second half of 2011 to be extended into 2012, which means that negative effects of the economic and financial crisis shall be reflected in the composition and volume of consumption, as well as more severe business and financial risks, particularly credit and foreign exchange risks.

Counter-crisis measures and strategic projects

Responding to the anticipated major aggravation of economic circumstances, Mercator has already devised a set of counter-crisis measures that are targeted at alleviating the burden of the harsh environment. These measures are also related to the key strategic projects to be implemented in 2012.

There are two subsets of these measures: 

1. measures to create value for the consumers, which are aimed at improving the competitiveness of our offer in the new, exacting conditions that have made consumers even more price-sensitive;
2. measures of internal rationalization and search for internal untapped improvement potential in business processes, working capital, investment, and real estate management.

Within this framework, the following key projects will be implemented in 2012:

• refreshment of fast-moving consumer goods offer in Slovenia;
• establishment of the technical consumer goods chain;
• restructuring of the offer in Croatia;
• real estate monetization project.

Sales

In 2012, the Group is planning revenue of more than EUR 3 billion, which is 3.3 percent more than the estimate for 2011. According to plans, 56 percent of Group revenue in 2012 will be generated in Slovenia, and the remaining 44 percent will come from international markets. The Group plans to generate the majority of revenue by retail and wholesale of fast-moving consumer goods which will, combined, represent 85 percent of total revenue.

In addition to the planned marketing activities, the revenue growth planned for 2012 is also affected by planned operations of the trade companies Drvopromet, Familija Marketi, and Coka. Subject to strategic combinations with Mercator in 2011, the revenue of these companies as planned for the entire year will count against Mercator Group total revenue in 2012. The Group is planning numerous activities to provide a competitive offer and generate value for the consumers in all markets.

Development activities

Responding to the expectations of harsh conditions in 2012, the Group additionally trimmed down its investment plans. Hence, total investment is planned at no more than EUR 88.5 million, with planned divestment of non-core assets in the amount of EUR 10.1 million. Development activities will be pursued further and new retail area will be obtained through lease in order to maximize the amount of new retail area and generate revenue growth without exceeding the allocated investment budget.

Real property monetization and stable financial operations

In 2012, the activities of monetizing the Group real property will continue. They include plans to sell a part of the real estate portfolio worth EUR 250 million. All proceeds from real estate monetization shall be used to reduce the outstanding debt which is planned to decrease notably relative to the end of 2011.

Gross cash flow from operating activities before rental expenses is planned at EUR 214 million for 2012, which is 4.6 percent more than estimated for 2011. Gross cash flow from operating activities is planned to amount to EUR 150 million; the 7-percent decrease in this figure relative to the 2011 estimate is a result of the planned real property monetization and more adverse economic conditions.

Net income and dividend

Due to the expected considerably aggravated economic circumstances and the resulting drop in revenue, lower investment, price investments required to provide competitive prices for the consumers, costs of strategic projects referred to above, upward pressure on fuel prices, some other costs, and increased operational risks, the performance planned for Mercator Group operations in 2012 falls short of the estimated results for 2011.

Hence, Mercator Group net income for 2012 is planned at EUR 15,708 thousand, which is 34.0 percent less than the 2011 estimate. Due to lower actual and planned profit, the gross dividend payment for 2012 considered in this Business Plan amounts to EUR 3.00 per ordinary share.

Human resource management

As at 31 December 2011, Mercator Group had 24,267 employees, of which more than 12 thousand were employed in Slovenia. This makes Mercator the single largest employer in Slovenia and one of the largest employers in the region of Southeastern Europe. In 2012, no major changes in the number of employees are planned.

Quarterly review of viability of business plans due to high uncertainty regarding the actual operating conditions

Due to high uncertainty regarding the operating conditions in 2012, the highly volatile situation in the global financial markets, and social and political unrest in many countries of the Southeastern European region in which Mercator Group is conducting business operations, the Management Board shall review after each quarter the viability of the business plans with respect to the actual state of affairs in terms of economic conditions and the related risks. If required, the Management Board shall prepare the necessary adjustments or amendments to the Business Plan and inform the shareholders thereof in interim reports.

Performance estimate for 2011

Mercator Group is estimated to have generated EUR 2.93 billion of revenue in 2011, which is 5.4 percent more than in 2010. Net income amounted to EUR 23.8 million or 21.6 percent less than in 2010. The reasons for somewhat more modest performance are the following: notable aggravation of economic circumstances in the second half of 2011; detrimental changes in HRK and RSD exchange rates in the last quarter of 2011; the need for additional investments into competitive pricing in order to maintain competitiveness following the substantial changes in the volume and composition of consumption and intensification of competition; and other reasons. Expecting the economic conditions to grow even more exacting in 2012, the Management Board adopted already in late 2011 a set of counter-crisis measures to mitigate the risks and their negative impacts on the Mercator Group operations.

Supervisory Board adopted Business Plan for year 2012.

Decision regarding the takeover bid for Pivovarna Laško, d.d.

At the Supervisory Board session, the Management Board presented the strategic project of a takeover bid for Pivovarna Laško, including the business reasons, economic justification, and relevant assessments. Furthermore, the Management Board informed the Supervisory Board about their decision adopted on 19 January 2012 not to announce a takeover bid for all shares of the company Pivovarna Laško, d.d., despite the business appeal of such move. The reason for such decision is the convocation of the Pivovarna Laško, d.d., General Assembly following Mercator announcement of the takeover intent. Some of the resolutions proposed for the Assembly would have, had they been adopted, resulted in uncontainable legal and economic risks that no bidding party would have been able to efficiently and reliably hedge before or during the takeover bid.

To use the jargon of M&A business, the General Assembly of Pivovarna Laško and the proposed resolutions included a set of "poison pills" that Mercator as an interested acquirer in no case could "swallow". Mercator Management Board firmly believes, however, that the governance bodies of Pivovarna Laško, d.d., did not propose the said resolutions in order to render impossible the takeover but simply to pursue their business interests and to protect the interests of the company Pivovarna Laško, d.d.

Major risks in this regard include the following:

1. Issue of up 100 percent of new share capital at a price of EUR 10.00 per share, which is less than 30 percent of the fair value of the company share as appraised by a certified expert commissioned by the Pivovarna Laško Management Board.
2. Possibility of issue of approved capital of up to 50 percent of the company share capital with omission of the pre-emptive right and without specification of price parameters.
3. Signing an agreement to sell the shareholding in the company Mercator, d.d., which included parts that deviate strongly from the market standards and result in imbalance to the benefit of the buyer, where the content of the agreement was not known to the Mercator before the convocation of the Pivovarna Laško Supervisory Board meeting.

Furthermore, the signed Agreements on Management and Organization of Contractual Corporate Group dated 27 December 2011, which are a part of the documentation for the convened General Assembly of the company Pivovarna Laško, d.d., disclose the fair value of the Pivovarna Laško, d.d., stock as appraised by a certified expert commissioned by the Pivovarna Laško, d.d., Management Board in the amount of EUR 34.00 per share. Appraisal of fair value of the Pivovarna Laško, d.d., share, assuming the acquisition of 100-percent interest, conducted for Mercator based on publicly available information by a certified expert, yielded a figure of EUR 19.00 (within a certain interval around this value). Considering this price and the value of all effects of restructuring and potential synergies, the price per share of Pivovarna Laško, d.d., for an investor (in this case Mercator, d.d.) does not reach the value of EUR 34.00 per share, assuming that Mercator would have acquired at least a 75-percent interest in the takeover target, which would afford effective control of the company. Mercator, d.d., based on the company's own appraisals and analyses, considered the price or EUR 19.00 as the starting takeover price per share of Pivovarna Laško, d.d., in a combined offer of Mercator shares issued based on approved capital valued at fair price, and a cash payment, with a 75-percent success threshold; during the takeover bid, if it had been announced, the bidder would have had the option to improve the offer.

As a result of the said deviations in terms of price per share, it was reasonably expectable that the Management Board of Pivovarna Laško, d.d., could not view as appropriate any offer below EUR 34.00 per share and that the owners of major blocks of Pivovarna Laško, d.d., shares would not be able to justify their due diligence in case of disposal of shares below this price (since the price per share of EUR 34.00 was publicly announced in an official company document dated 27 December 2011 and since it represents the best estimate or appraisal of the fair value of Pivovarna Laško, d.d., share as this appraisal was commissioned by the company management who have access to all information about the company, including internal information or information that has not been publicly disclosed). Therefore, it could be reasonably expected that a takeover bid by Mercator, d.d., with a target of 75 percent interest, would not have been successful given the assumed economic starting points.

Due to the new facts that came into effect with the convocation of the Shareholders Assembly of Pivovarna Laško, d.d., following the announcement of Mercator takeover intent, and the related legal risks that could not have been effectively eliminated or dealt with before or during the takeover, and risks regarding the probability of success of the bid given the known economic assumptions and starting points, the Management Board of Mercator, d.d., adopted the decision not to announce a takeover bid for the company Pivovarna Laško, d.d. In making this decision, Mercator Management Board also took into consideration the recommendations of their legal advisor and consultant.

Other notable Supervisory Board resolutions

As customary at every session, the Supervisory Board was also informed about the procedure of sale of the majority block of shares of the company Mercator, d.d.

Being a shareholder of Pivovarna Laško, d.d., the company Mercator, d.d., obtained as a part of the documentation for the convened General Assembly of the former a copy of the sales agreement for the shares of the company Mercator, d.d., to the company Agrokor, d.d. This, in light of Mercator previous activities, allowed the company to obtain further legal opinions, which were discussed by the Supervisory Board.

Legal experts make the following conclusions in their opinions:

• Sales agreement fails to provide appropriate protection of the interests of the Mercator Group in several essential aspects, contrary to what was laid down in the initial wording of the agreement with the consortium of sellers and the consortium of buyers as prepared by the Management Board and confirmed by the Supervisory Board of the company Mercator, d.d.
• Certain parts of the sales agreement deviate from the market standards in a way that causes imbalance to the benefit of the company Agrokor, d.d., and in a way that could be detrimental to Mercator operations, which could lead to a loss of value upon which the value of shares held by all Mercator shareholders relies.

For these reasons, entering the said agreement is not in the best interest of the company Mercator, d.d., and Mercator governance bodies cannot conduct any activities that would contribute to the signing or execution of such agreement as such conduct could be viewed as a failure to perform their duties with the diligence of a good manager. In other words nor Management Board nor Supervisory Board should conduct any activities which could support the implementation and the conclusion of the shares sales agreement (in the currently known form).

Business plan of the Mercator Group and the company Poslovni sistem Mercator, d.d., for the year 2012 is enclosed.

This announcement will be published on the company’s website at www.mercator.si as of 19 January 2012, and will remain posted for a period of at least five years.