Debt holds back Russia's 36.6 expansion

Russia's largest pharmacy chain 36.6 has announced plans to more than double its market share over the next five years. Analysts aren't so sure, as aggressive expansion has already loaded the company with debt.

In the past three years Russia's number one pharmaceuticals retailer increased the number of outlets across the country from 450 to more than 1,200.

However, expansion has come at a price. As of end 2007, the company's net debt totaled $US 270 million.

That's forced the management to make refinancing the debt their first priority.

“In my opinion they're taking the right measures really at this stage of development. The company has been loss making for a number of years and they have to tackle the problem,” said Viktoria Grankina, Troika Dialog senior analyst.

To make the business profitable, the company will have to close some recently-acquired and rebranded stores – a brave but necessary step, which is also likely to be seen positively by investors.

“No one likes it when outlets are closed. But their efficiency is at stake. If a mistake has been made, it's right for the management to admit it, close the drug-store and learn from the experience,” Maksim Orlovsky – director of Prosperity Capital Management – says.

The retailer is also considering the sale of non-core assets such as the European Medical Centre in Moscow and drug-making unit Veropharm, which together with some real estate assets are valued at around $US 450 million.

It will also issue convertible bonds rather than currently high-priced traditional bonds and credits.

Most market watchers say the strategy gives 36.6 good chance of survival in a fast growing industry.