Orco shareholders claim mismanagement

After postponing 2008's results, Orco Property Group finally published unaudited results of nearly 400 million euros in losses, significantly greater than even the most pessimistic predictions. The global recession has understandably hit companies across the board, but the group was too ambitious in its rapid expansion in the period preceding the crisis, said a Czech shareholder who is leading the charge to force changes at the company's top level.

"It's a typical crisis that gave off signals in the past, and the present management underestimated it. They got caught with their pants down," said Luboš Smrčka, chairman of SOS Orco, an association formed in February to protect the interests of small shareholders. "Orco's management took risks in the past that proved to be inappropriate and unsuitable."

The association controls nearly 10 percent of the company's shares, and members are planning to attend the company's April 30 general meeting in Luxembourg. While the group has previously expressed a desire for CEO Jean-Francois Ott to resign, Smrčka said the group will wait and see what additional information comes out of the meeting.

The discontent and Smrčka's tongue-in-cheek aim to "raise the flag of revolution" isn't simply the result of the company's losses, but rather a company culture that didn't always put the interests of shareholders first by failing to communicate, Smrčka said. The company's results were postponed three times before finally being published April 7.

"The communication policy of the company is very strange and very weak; they had problems with this even in the last year," said Karel Potměšil, an analyst with Cyrrus. Potměšil's firm had forecasted a loss of 300 million euros, which had already been revised upward after the company's delays in publishing results caused rampant market speculation. Ultimately, the losses stem from a crippled real estate market that has decimated the value of the firm's assets.

"The market is weak. There are no buyers, so prices are going down, of course. But Orco itself made some mistakes last year - mainly, its expansion was too big. Now, it can't get enough money on the operational level," Potměšil said.

The French company entered a sauveguarde procedure at the end of March through a Paris court, which will protect the group from creditors for a minimum of six months. While the company is French, it has no projects in France. The majority of its assets is in Germany, while the rest lie in Hungary, Poland, Croatia, Slovakia and the Czech Republic. The sauveguarde could potentially be extended up to 18 months, giving the company enough time to fully implement newly installed Chief Financial Officer and Deputy CEO Nicolas Tomassini's financial reorganization plan.

"It's quite a radical plan," he said, with the mother company taking back much of the control from its subsidiaries and either closing or significantly downsizing regional offices. In the Czech Republic, the regional offices outside of Prague will be closed. "I can be ruthless with subsidiaries that don't perform; I am first and foremost CFO of the mother company, not of the subsidiaries. That means I have implemented much tighter control within the organization, and only the mother company can decide the priorities," he added.

The company has not yet finalized which countries it will completely exit. There is also the possibility of delisting the firm's shares on some of the regional bourses, since the listings have failed to raise money and, instead, are only generating further costs. The group is currently listed in Prague, Warsaw, Paris and Budapest, and will consider withdrawing from all except Paris, Tomassini said.

Smrčka has no problems with the strategy itself, which is neutral and can be judged only by the ends to which it is used, he said. The current situation in the courts has made its shareholders understandably nervous, he added.

"I don't personally have a problem with [the plan]. But, by disrespecting risks and an insensitivity to the market developments, the company's management brought Orco to the edge of a chasm," he said.

Tomassini's priority is injecting liquidity back into a company that has been all but paralyzed by loans. Within the structure of the sauveguarde, the financial team created by Tomassini will negotiate with its creditors to avoid selling too many assets during a time when real estate has become so devalued.

"We're not doing a grand sale program," he said. "My focus right now is to have cash move up rather than move down. ... One easy way to do that is to freeze some development projects and not invest any more money."

The company's projects in the Czech Republic have, in fact, performed favorably compared to its assets in other regions, and Tomassini said he doesn't foresee canceling any major projects here or even freezing any projects that have already been started. Residential projects in the Czech Republic have been some of the company's soundest investments, he added.

Whether the company did anything wrong is a "vicious question," Tomassini said, as the group was simply acting on what the market supported at the time.

"We were in expansion mode. ... The market was backing that approach, so I can't say it was the wrong approach," he said.

The firm's previous decentralized organization, which he is now reining in, was also sensible at the time, as it allowed the subsidiaries to react more quickly to market opportunities.

Claire Compton can be reached at
ccompton@praguepost.com