Karelia Tobacco: Minority Shareholders Held Hostage in Family Feud

It’s been a while since I last wrote about Greek cigarette company Karelia Tobacco, mostly for lack of developments on the business front or otherwise. My campaign to convince the board of directors to initiate a split of the company’s  listed shares has unfortunately been met with consistent silence. Fortunately, the company’s business performance has been somewhat satisfactory, with lower exports to Africa mostly offset by higher-margin sales in Greece and Europe. This enforces my notion that the company’s business is cared for in a satisfactory manner, while its corporate governance is in decidely worse shape.

A House Divided

It is quite difficult to find reliable information about the company, or the Karelias family behind it (in English at least). But over time some pieces of this Greek enigma have started falling into place. I was always aware of the fact that there are currently two factions in the extended Karelias family, one intimately involved in daily operations, led by CEO Andrew Karelias, and another group consisting of the widow (Asimina Spyropoulou) and daughter (Ioanna Karelia) of deceased company executive Kostas Karelias. Kostas’s death in the Kalamata marina in 2009 is surrounded with mystery, but it appears he fell into the water and drowned. This unfortunate event appears to have deepened (or created) the rifts within the family.

Conflicts within well-to-do families are about as common as get-rich-quick schemes on the internet, so it really is not that surprising we are seeing the same thing at Karelia. But the rift in the Karelia family has only become apparent to those looking closely at company filings. Last year’s annual meeting was, at the request of Ioanna Karelia and Asimini Spyropoulou, postponed until a later date. This request was within their rights as owners of a significant block of shares, but somewhat unsatisfactory to outsiders since it meant shareholders had to reconvene and suffer through the postponement of the dividend payment (by more than a month).

The official explanation was that they had requested additional documentation, which they wished to study before casting their votes. They subsequently voted against all measures on the reconvened meeting in July, which meant all items on the agenda passed with very slight majorities. In my opinion, something else is likely behind this obstruction; there may be disagreement within the two branches of the Karelia family, possibly over capital allocation (dividends), board seats or the strategic future of the company.

Ioanna and Asimina currently have no board representation at all, which is highly remarkable given their 40-something percentage stake in the business. The other faction has three board seats with Andrew, Stathis and Victoria Karelia all holding seats and only two ‘independent’ directors. It is therefore possible that Ioanna and Asimina are using their right to ask for a postponement simply to express their discontent over some issue unknown to us, which is unfortunate for minority shareholders.

Victoria, Andreas (or Andrew) and Stathis Karelias are all substantial shareholders and all three currently hold board seats. Photo credits (presumably) belong to the Karelia Tobacco co.

Meanwhile the company’s independent directors are, as far as I’m concerned, perhaps not so independent at all. Mr. Vassilopoulos is alternately referred to as either a consultant or a director, which raises the suspicion that he is also performing consultancy services for the company (and presumably compensated for it). If this is the case his independence would be in doubt. The second non-family director is Mr. Rob Lewellyn Joy, a British national and the only non-Greek, and a person with little information publicly available. The company description offered on Mr. Joy at the time of his nomination as a director has made me wonder about his qualifications for this board.

Obstruct, Fail, Repeat

On to the issue at hand: In June, the Annual Meeting for approving the company’s financial statements for 2017 and this year’s dividend payment was held. Surprise, surprise, Ioanna Karelia and her mother Asimina once again requested to postpone the Annual Meeting, this time to July 19th 2017. Which once again means the dividend payment was delayed, and of course both the company and the outside family members have failed to provide any clarification regarding the real reason why.

To me, the situation now has all signs of a family feud being waged at the expense of minority shareholders, despite all the exemplary words on corporate governance in the company’s financial statements. Perhaps it would be overly dramatic to cast this family tragedy on the larger stage of Greece’s troubles as a whole, but certain similarities are quite obvious. After all, conflicts over the entitlements of a fool-hardy ruling class being waged at the expense of the average guy feels all to familiar by now. Because the Karelia family has consistently displayed a complete and utter disregard for the interests of the minority shareholders, I have recently decided to sell all my shares in the company.

Second to my concerns over the Karelia family’s internal affairs, I also feel less certain about the company’s business prospects. Karelia has generally maintained a product line that was in line with market demand trends in slim cigarettes and rolling tobacco. But the aggressive movements into reduced-risk products by Philip Morris could push them into a defensive position fairly quickly. PM, which is the Greek market leader through its subsidiary PM Papastratos, is in the process of converting its facility in Greece to produce RRP Heatsticks, which would make it logical for this product to be introduced in Greece as well.

While we do not yet know whether PM will be able to replicate the success of iQos/Heatsticks in markets other than Japan, I have been impressed by the aggressiveness of their bet on this product. Smaller companies like Karelia would probably face an uphill struggle competing in this product line, which has given me an additional reason to sell. Luckily I am exiting with a decent profit, but also with a particularly bad aftertaste.