Glenboden M & A Originations

CEDC ripening for sale after finally acquiring Russian platform

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Origination Status closure announced of structured business acquisition, March 2008
Asset production and distribution assets of Parliament vodka (Russia), leading domestic premium vodka brand and spirits importer and distributor
Buyer Central European Distribution Corporation (Poland), leading vodka supplier in CE
Seller Copecresto Enterprises Ltd (Cyprus), holding company of Parliament Group
Buyer Rationale market entry into Russia, distribution system, local vodka brand
Seller Rationale stronger partner for consolidation of Russian spirits market, portfolio expansion
NBs CEDC also negotiating acquisition of second distributor in Russia, Whitehall
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This is a frenetic time for CEDC’s acquisition function in Russia. We’ve been trying to keep up with them, but it’s not easy. Our main point is that, even if CEDC has the ‘legs’ to continue onwards and upwards for a while yet, as an independent, there are stronger macroeconomic and spirits market forces, in the countries where it operates and in the US, that suggest the peak time for the shareholders to secure a buyer amongst the spirits majors is now, with the group having secured a crucial expansion platform in Russia by closing the deal with Parliament.

This year CEDC has been running two major market entry deals in Russia, in parallel it seems; namely Parliament and Whitehall. Let’s assume that the name association between the two isn’t a code telling us that, behind the scenes, they actually belong to one and the same group, and have a lot of overlap.

Parliament is a distributor with forecast 2008 net sales of $120 mln, and a growth rate of 20-25% over 2007; the corresponding figures for Whitehall are $200 mln and 15-20%. Parliament includes a leading premium vodka brand, of the same name; Whitehall an ultra-premium one called Kauffman, after the company’s founder.

If CEDC succeeds in acquiring both of them, then they will have bought combined net sales of over $300 mln, growth of around 20% and the makings of a strong domestic vodka portfolio. On top of that you have the synergy benefits.

In terms of valuation, clearly the Parliament deal lays down a marker for Whitehall’s owners, with the substantial amount paid in CEDC shares, at 40% of total consideration, providing a means of fudging away any remaining differences in valuation expectations with Whitehall also.

In financing terms, the group has prepared itself to cope with both acquisitions. It’s issuing convertible notes to the value of $310 mln; the idea seems to be that this will cover the cash portions of both acquisitions. In the case of Whitehall, CEDC is to only acquire 49% of Mark Kauffman’s shares initially, with the remainder callable in 2013. That ties in maybe with the convertible notes being due in the same year; presumably CEDC will issue more at that point, to buy out the rest of Whitehall.

In growth story terms, this second acquisition is very important for CEDC. With the Parliament deal, its net sales guidance increases to about $1,45 bln this year, which would mean a drop in 2008 growth, next to the group’s headline CAGR of 25%. By adding the Whitehall numbers, CEDC will be able to comfortably exceed this 25% growth rate.

So, CEDC has the strategy, the means and the incentive to succeed with both deals, and soon.

Subsequently, in our view, the shareholders should seriously look to sell the business, within the next year. CEDC is listed in New York, and its financials are consolidated in US$. Most of its operations are in Poland; the Polish zloty has appreciated against the US$ by 20% in YTD 2008. On top of that, the Polish spirits market grew by 15% in 2007, with a strong premiumisation trend, to say nothing of Russia’s growth rates.

How long before the currency factor reverses, and the growth rates slow? Finally, won’t CEDC’s deal-making machine run out of steam, after this twin foray into Russia?

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THIS LEAD'S VALUATION
Size (€ mln) 205
Sector spirits
Asset Quality Russian distribution leader
Seller private
Buyer mid-cap plc
P/S 3,0
P/Ebitda n/a
Type total consideration
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