Evrotek

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	27059
Company name	Evrotek Group
Country	Ukraine
Sector	Wholesale and Retail Trade
Environmental category	B
Department	Global Manufacturing & Services
Status	Active

Date SPI disclosed	May 12, 2008
Projected board date	June 12, 2008
Previous Events	Invested: November 5, 2008 Signed: October 3, 2008 Approved: August 8, 2008

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Evrotek (Evrotek or the Group) is a start-up supermarket retail chain group that currently operates 3 stores and intends to expand to a total of 58 stores located in 25 regional cities throughout Ukraine over the next two years.

The project involves:

- creation of a modern food retail chain under the brand name “Fresh”
- development of up to 58 new stores (23 mini-hypermarkets and 35 supermarkets); and
- construction of 4 logistic centers.

The Group intends to capitalize on the existing fragmented market by expanding aggressively in regions where market growth potential is expected to be high and existing competition still relatively underdeveloped.

Project sponsor and major shareholders of project company

Mr. Mikhailo Veselskyy (the sponsor) is a Ukrainian national who founded Evrotek in 1995 to initially focus on the business of fuel delivery to agriculture producers and the trade of grain and sunflower seeds. By 2003, Evrotek had evolved into the production of sunflower oil seed and within 3 years was amongst the top players in Ukraine with a 15% market share and annual sales of $95 million. In 2006, recognizing the changing nature of the market and the need for economies of scale, he exited this business selling to a market competitor and reinvested his asset sale proceeds into the creation of new retail supermarket chain.

The sponsor has expended resources to analyze the food retail market, built a team of experienced retail managers and identified and acquired sites around the country. To date, three stores are in operation (the first store opened in October 2007 and two opened in February/March 2008) and thirteen more stores are expected to open over the next nine months.

The Group currently consists of two companies namely, Evrotek Development (or DC), the real estate company which is now 100% owned by the sponsor and its wholly-owned subsidiary Evrotek Retail (or RC), the retail operating company. A new offshore holding company (JV Holding Company) will be established to own 100% of DC. With new investments from IFC and the other equity investors, the shareholding percentage in JV Holding Company will be: Mr.Veselskyy (51.52%), Other Investors (36.36%) and IFC (12.12%).

Total project cost and amount and nature of IFC's investment

Total project cost is estimated at $450 million. The proposed IFC investment an equity investment of up to $20 million and a subordinated C loan of up to $55 million.

Location of project and description of site

The stores will be located in both major and smaller cities including Kyiv, Kharkiv, Lugansk, Kherson, Ivano-Frankovsk, Poltava, Dnipropetrovsk, and Odessa. The Group is in the process of identifying new locations in other cities in Ukraine. All stores will be constructed on the greenfield sites. New sites will be chosen on the basis of proximity to residential areas, major roads and transportation routes.

Anticipated development impact of the project

The project will help support a local, start-up food retail company develop into regional chain that can benefit from economies of scale, improve retail infrastructure, retail management operation systems (such as centralized management, buying and distribution systems) and develop potential linkages in the supply chain, providing access to small scale entrepreneurs.

The proposed investment is expected to:

- create regional employment (both during construction and the operational stages);
- introduce modern supermarket retailing to Ukraine’s regional cities thereby stimulating competition resulting in broader product offering at more affordable prices and;
- help improve local supply linkages.

IFC's expected development contribution

Global Industry Best Knowledge and Practices:

- Evrotek views IFC’s sector expertise, regional knowledge and its experience in other retails projects in the region brings value to the proposed investment. IFC is providing its global industry expertise and technical knowledge to help the company focus its retail expansion strategy in Ukraine and improve retail operations and management.

Provision of Flexible Long-term financing:

- IFC will provide long term flexible financing through the proposed subordinated debt component, would not only bridge a financing shortfall but be structured to accommodate the project’s extensive capital outlays during the initial ramp-up years. Long term subordinated financing is not easily available in Ukraine.

Environmental & Social and Corporate Governance Standards:

- IFC will assist the company to maintain higher environmental, fire & life safety and social standards. IFC will also share its knowledge of best practices in corporate governance with the company.

Stamp of Approval:

- IFC’s involvement in the project will provide additional comfort for commercial lenders and help Evrotek mobilize private sector resources at reasonable interest rates.

Environmental and social issues - Category B

Evrotek is a category B project according to IFC's environmental and social review procedure. A summary of IFC’s environmental and social review findings for the project including the rationale for the B categorization is publicly available in the Environmental and Social Review Summary (ESRS). The Environmental and Social Action Plan (ESAP), which is attached to the ESRS, contains specific tasks that the client will undertake to mitigate perceived risks and impacts from the project, and to ensure compliance with IFC’s Performance Standards.

The main environmental and social aspects of the proposed project are:

- environmental, health and safety management of growing Evrotek chain in Ukraine;
- labor issues management; and
- life and fire safety.

The ESAP contains actions Evrotek has committed to such as:

- developing environmental, health and safety management systems;
- developing procedures to effectively negotiate the conditions of collective bargaining agreement with employees and support the existing grievance mechanism;
- independent review of Life and Fire Safety Master Plan and existing facilities, and corrective action plan, as necessary.

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