LJUBLJANA With its pristine aisles and well-stocked shelves, Slovenian food retailer Mercator doesn't look like a supermarket owned, indirectly, by an ex-Communist state in Eastern Europe.
Like the country itself, Slovenia's biggest employer appeared a picture of dynamic good health.
But since taking the helm in June 2012, Mercator CEO Toni Balazic has been the bearer of bad news: not only is the company actually making a loss, he now says it will have to shed up to 1,000 of its 23,900 jobs to stay afloat.
Slovenia is scrambling to sell the chain, along with more than a dozen state firms that the tiny Alpine country must divest to avoid going cap in hand to the European Union for a bailout of its floundering financial system.
The former Yugoslav republic's economic model has crashed since the global crisis ravaged its vital European export market and shackled its mainly state-owned banks with 7 billion euros of loans that are not being paid back.
The crisis has exposed a culture of poor management and cronyism in an economy around 50 percent controlled by the state.
Slovenia is now staring at a fire-sale of public assets that were once considered sacrosanct. Critics say the country will rue not having sold them earlier.
The European Commission urged Slovenia on Wednesday to speed up privatization and "establish, by September 2013, an ambitious timetable for the divestment of direct and indirect state shareholdings of banks".
"Slovenia is now being forced to sell its assets at much lower prices," said Slovenian economist Egon Zakrajsek, who works for the U.S. Federal Reserve System but was commenting in a private capacity.
Privatization should have occurred in the early 1990s, he told Reuters, as soon as Slovenia became independent. The most northerly former Yugoslav republic, which borders on EU members Austria and Italy, blazed a trail for the Balkan region by joining the EU in 2004 and the euro currency bloc in 2007.
"Instead," he said, "A small group of politically connected quasi-experts in economics persuaded former communist politicians that foreign direct investment was bad for economic development and that most of the country's assets should remain in Slovenian hands, owned either directly by the government, or by the government using its influence in the banking system to channel cheap credit to politically-connected managers."
Mercator (MELR.LJ) is 19 percent owned by Slovenia's state banks, which are the largest in the country. They are also among the main owners of brewery Pivovarna Lasko PILR.LJ, which is the biggest shareholder in Mercator with 23 percent.
The banks acquired most of their stakes in Mercator and Lasko in 2009 in exchange for loans given to the previous owners - local firms connected to Lasko - that could not be repaid.
For years, political pressure from successive governments thwarted a sale of the supermarket chain. Riding high on rapid, export-driven economic growth, politicians were reluctant to give up such a powerful economic lever, with its potential for patronage.
But a bold expansion by Mercator into the Balkans backfired in the face of cheaper competition notably from privately-owned German discount retailers Hofer and Lidl, the Austrian owner of the international Spar brand and Serbia's Maxi, a unit of Belgian supermarket chain Delhaize DELB.BR.
The company has had to retreat from Albania and will quit Bulgaria this year.
Slovenia's exports led by Renault (RENA.PA) cars and auto components, household appliances and pharmaceuticals slumped with the onset of the global crisis.
The resulting strain on its banks risks making the country the sixth member of the 17-nation euro zone to seek a bailout from its EU partners and the International Monetary Fund.
To avoid that, the government hopes to raise up to 1 billion euros within a year from the sale of 15 state-controlled companies, including the second-biggest bank, Nova KBM NKBM.LJKBM.WA, the largest telecoms operator, Telekom Slovenia (TLSG.LJ), Ljubljana airport and national carrier Adria Airways.
Last year, Croatian food producer and retailer, Agrokor, offered 221 euros per share to buy Mercator, valuing the company at 832 million euros.
It withdrew the offer when the Slovenian firm's previous management refused to let the bidder conduct due diligence, arguing that Agrokor was its main rival in the Balkans and would gain vital business intelligence. Moreover, the deal might fall foul of competition authorities since it would increase Agrokor's already large market share in several Balkan states.
When Agrokor bid again in a new tender this year, it offered only half the price - 110 euros per share, according to sources close to Mercator's owners. It was still the highest bid.
"The right moment for the sale of Mercator was missed last year when the bid was twice as high," said Gregor Meden, an investment fund manager at investment firm KD Skladi.
"I believe Slovenian politicians are afraid of losing the privileges that would be gone with the sale of Mercator," he told the Slovenian daily Finance.
"The national interest story is almost always a story of losing rents and privileges."
In 2008, the government rejected all bids for Slovenia Telekom as too low, while in 2011 the state prevented the sale of Nova KBM bank, allowing private investors to buy only 49 percent of the new share issue while the state bought 51 percent through several state companies to keep a dominant stake.
This year, Belgian banking and insurance group KBC (KBC.BR) sold its 22 percent stake in Slovenia's largest bank, NLB, to the Slovenian state for 2.77 million euros after successive governments refused to sell it a majority share.
Loose lending, some of it to politically connected businessmen, has led the banks to the brink of collapse. They will be saved for now by a 900 million euro capital hike in July and the creation of a "bad bank" in June to siphon off non-performing loans.
According to former Finance Minister Janez Sustersic, in office for a year until January, state firms are run by a system of party quotas and horse-trading over who is appointed to the supervisory boards, management and even lower posts.
"The present way of managing (state companies) is the main reason why we need privatization," Sustersic told Slovenian daily Delo in an interview published on May 22. "The logic of party quotas is one of the worst things that exist...
"Nobody knows what parallel deals are made when positions in state companies are being traded," he said.
Sustersic, who quit last week the center-right Civic List party, a member of the current and previous ruling coalitions, declined to be interviewed for this story because he was traveling.
Even now, according to an opinion poll taken this month by Delo Stik, only 50 percent of Slovenians say they favor privatization.
Center-left Prime Minister Alenka Bratusek's two-month-old coalition government, an awkward alliance of right and left, is split too, with the second largest party, the Social Democrats, successors to the former Communist party, openly critical.
"We should sell companies that the state does not know how to manage, while the sale of those that offer stable employment and pour profits into the state budget is harder to understand," said the party's deputy leader, Agriculture Minister Dejan Zidan.
The Social Democrats would not cause a "political crisis" over the policy, he said, but financial markets remain skeptical about whether Bratusek can keep her pledge in the face of strong opposition.
Mercator's owners have asked Agrokor and investment fund Mid Europa Partners to raise their bids but have so far not reported whether the offers have been improved.
The signs are ominous.
Croatian metal products wholesaler Osimpex backed away last week from bidding for Slovenian shoemaker Peko, citing unspecified additional requirements from the state, which holds a majority stake. With 380 employees, Peko now faces bankruptcy.
Stanko Stepisnik, Slovenia's economy minister, made clear that politics would have "a big say" in the sale of Mercator.
(Reporting by Marja Novak; Editing by Matt Robinson and Paul Taylor)