Ownership struggle rages at prestigious porcelain maker

In somewhat familiar fashion, the private owner of Zsolnay, a prestigious Hungarian porcelain maker was targeted by the local government, as well as its associated interests with the backing of the government with the aim of taking control through legal channels. The plan backfired, leaving many issues open. What is certain is that Zsolnay is set to make a fortune in the near future, raising the stakes very high.

When historically-significant porcelain maker Zsolnay saw business troubles a few years ago, and even the oligarchy close to the government pulled support, the host town of southern Hungary’s Pecs was only too happy to sell the company to a new owner, which pledged to continue production and preserve the brand. Syrian-Swiss businessman Bachar Najari was he only bidder for the 74.5% package in 2013 with a bid of HUF 180 million. Najari has lived in Hungary for decades, has a Hungarian wife, they have a company together and he said in interviews that he decided on making the offer because Zsolnay is particularly close to him and he didn’t want to see the brand disappear. However, in light of the later years, he probably didn’t fully know what he was in for.

Good relations with the government and Pecs mayor Zsolt Pava, also a delegate of the governing Fidesz party, quickly soured after a sequence of events. First Petra Cseplos, head of Zsolnay’s board of directors and Najari’s wife made a motion to trademark the Zsolnay brand through her own company Swiss Art for the territory of the European Union. As she argued, it was in protection of the firm, since she got knowledge that one of the smaller stakeholders was planning a similar move, thereby taking the brand, Zsolnay’s most valuable property out of the majority owner’s control. The response was a police investigation, since perception at the time was that Swiss Art was actually trying to steal the brand. Charges were later dropped.

Then, 2016 saw the start of a sequence of events that point to a coordinated effort to squeeze Najari out of his asset. In January, much to Najari’s surprise, the government declared Zsolnay a priority company, thereby essentially taking it under state custody. As it turned out, the measure was initiated by Pava. As he argued, Zsolnay had accumulated significant debts to the extent that without the state’s protection, the company could fail and the Zsolnay brand could disappear. In April, the company was targeted be the tax authority NAV. As a key point in the story, in May, the state-owned development bank MFB terminated a HUF 433 million loan contract with Zsolnay.

A few days later, the Pecs municipality decided on setting up a new firm, Ledina. The expectation was that in light of the financial difficulties set to arise after the MFB move, Zsolnay could shortly go into liquidation, and Ledina could step in to take over the brand and the assets. Shortly afterwards NAV impounded Zsolnay’s assets, halting production. Yet another few days later some 100 Zsolnay employees quit citing lack of confidence in the management with essentially the same resignation forms used. These workers transitioned seamlessly to Ledina’s payroll.

Zsolnay’s liquidation was initiated three days later, citing the outstanding HUF 400 million debt that couldn’t be covered in the absence of the MFB backing. In the meantime, MFB sold the Zsolnay debt portfolio to a government-friendly construction company West Hungaria Bau (WHB). This was the entity to actually start the liquidation process.

However, Najari apparently wasn’t going to take this lying down and paid the outstanding sum to WHB in August. Zsolnay avoided liquidation, Najari kept the factory and the brand. What seemed like a very clever squeeze-out plan involving city, government and relevant authorities crumbled immediately. Apparently the would-be new owners simply couldn’t imagine the possibility that Najari could raise the necessary amount of money to settle the debt. In a strange twist, this also gave him mortgage rights to a number of municipality real estate assets that were included in the Zsolnay portfolio.

As he recollected, after initial shock of the campaign that was launched against him, Najari stressed that he became determined not to shy away from the battle. He and his wife made frequent media appearances and they also explored every legal avenue available. And they proved successful. There is a court ruling that the NAV impound on Zsolnay’s assets earlier was unlawful. An accelerated liquidation motion by state-appointed asset manager Sandor Borcsok was rejected by another court, since at that time it was apparent that Najari was going to pay the debt.

But there are still other matters in process. Najari made commitment to implement a HUF 500 million capital raise when he bought majority ownership from Pecs. Some HUF 300 million of the sum is not in development funds, but covered by the book value of a real estate asset. The dispute over use of the Zsolnay brand is still not resolved, Pecs made additional legal challenges with the involvement of the Zsolnay family. In the meantime Najari is suing the 100 former employees who quit in a coordinated move stating they endangered the operation of the firm. They also made complaints against the fact that WHB allegedly paid only HUF 200 million, half of the original value of the MFB package.

In the meantime Ledina exists, but has nothing to do, although it has employees to pay. Since the original plan to take over Zsolnay failed, the municipality decided to sell Ledina to Janos Bozoki, a businessman who has a joint company with Pecs legal representative Ivan Szabo.

To better understand the motive behind the effort to oust Najari, as well as his staunch resistance, it has to be pointed out that Zsolnay’s main business profile, although it is best known, isn’t artistic porcelain plates and dishes. The company works within pirogranite, a stone mainly used as the material for artistic decorations on historic buildings. This sector is set to take off, there are several high-value projects in the making including a multi-billion state-supported castle renovation program, meaning Zsolnay is set to make a lot of money in the coming years. On the flipside, Pecs attorney Ivan Szabo told that Najari is a master at communicating that he is the victim, but he is hardly without blame.

The main issue is the mentioned fact that the promised capital raise was covered in large part by committing the book value of a real estate asset. However, as a Pecs-appointed appraiser determined, opposed to Najari’s HUF 300 million value claim, the asset in question, a water tower at a military barracks, was worth HUF 50 million at most.

There was also the matter of a compensation obligation. In 2005, the state transferred Zsolnay to the Pecs municipality on condition that the porcelain maker would need to generate at least HUF 800 million from the sale of Zsolnay’s traditional porcelain products, or pay a certain penalty. As there were years when the condition was not met, a substantial sum in payable fines was amassed. Najari stated that he would not pay the amount, as he did not have any valid agreement on the matter with the state and his contract with the minority-owner municipality didn’t cover the issue.

Szabo maintains that the termination of the MFB loan raised general fears that Zsolnay, a symbol of Pecs may disappear and that the employees who sometimes complained about poor working conditions would lose their jobs. Szabo told us that WHB approached Pecs saying that it would be happy to take over, since Zsolnay could fit into its construction portfolio. The idea at that time was to give Najari a way to leave elegantly. However, when the owner refused to depart, hostilities truly erupted.

As things stand now, Ledina is in an in-between state, having around 100 qualified former Zsolnay employees. Its owner Bozoki is planning major investments and introduced a new business model. Ledina will manufacture porcelain-ware affordable to ordinary households to be sold at major retailers.

Szabo noted, Ledina employees have a hard time dealing with this concept. Many of them who made unique pieces that were then sold at astronomical prices are insulted by the idea that they should make cheap mass-produced items that are then sold in ordinary retail outlets.

He was nonetheless optimistic, that the tensions with Najari could be resolved, all it would take is to reach mutually beneficial compromises and review the terms of the original agreement. This could serve to eliminate all the problematic aspects and assure the city broader veto rights while Najari’s business interests wouldn’t be ignored.

Original articles in Hungarian here and here

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