Glenboden M & A Originations

CEDC’s status grows from acquisition candidate to takeover target after third deal in Russia

Priority Rating priority rating 4
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Origination Status announcement of completion of strategic investment, July 2008
Asset Russian Alcohol Group (Russia), no.1 domestic sub-premium vodka producer
Buyer Central European Distribution Corporation (Poland), no.4 global vodka supplier
Seller Sergei Generalov and other owners of Russian Alcohol Group
Buyer Rationale market leadership in mainstream and sub-premium branded vodka in Russia
Seller Rationale stronger partner for consolidation of Russian spirits market, portfolio expansion
NBs CEDC’s co-investor in RAG is Lion Capital (private equity)
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When CEDC made its first acquisition in Russia a few months ago, that of the Parliament premium vodka brand, we argued that the group had created a platform in Russia which, together with macro-economic and timing factors, meant that it had become a ripe acquisition candidate. Having made two additional acquisitions in Russia, since then, CEDC has grown its turnover by nearly 50% in total, achieved market leadership in both the premium and sub-premium vodka segments in Russia, and beefed up its overall growth rate in CEE. We therefore upgrade CEDC to the class of ‘takeover targets’, a status warranted all the more by its NYSE listing and sophisticated financing structures.

This year CEDC has run and completed three major market entry deals in Russia, in parallel; namely Parliament, Whitehall and now RAG. Assuming there are no overlaps by these businesses, and that 100% of their revenues will be incremental for CEDC, their combined impact on CEDC’s operations are immense.

Leaving aside the strength of the brands, which is still a contentious issue in the fragmented Russian market, the scale and growth rates of these companies are impressive.

Parliament, a spirits distributor and market leader with its own brand, brings 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% (although Whitehall is essentially just a distributor). Leaving aside the fact that RAG will not be consolidated until CEDC converts its loan notes to equity in 2010, that group has forecast turnover of $ 500 mln in 2008, plus a staggering 40% volume growth rate reportedly.

In total, therefore, these three acquisitions could deliver over $ 800 mln in turnover, with a 30% growth rate, to CEDC. On top of that there are all the synergy benefits to the group’s operating profit.

Small wonder that, even before the RAG acquisition, CEDC was able to post a 57% increase in Q1 2008 turnover, as well as growth in its gross margin from 21% to 24%, plus a significant increase in its full year 2008 sales guidance to $ 1,57 – 1,70 bln.

In terms of valuation, RAG appears to come at a significant discount to Parliament, valued at x3 Sales according to our estimate. That surely reflects the lower margins of ‘mainstream’ or sub -premium vodka, as opposed to the premium variety. The valuation also appears to be lower than the x1,5 paid for the Whitehall distribution business, with its ultra –premium niche tail, although our estimate in that case is questionable given the heavily structured nature of that deal.

In financing terms, CEDC is a complex animal; this needs to be carefully assessed by any potential takeover bidder. At the sources of funds end, it has issuing convertible notes to the value of $310 mln; at the uses of funds end, CEDC has options to acquire remaining shares in all the Russian companies it’s acquired, at various future points in time. Presumably the group will look to issue more convertible notes or equivalent instruments, once those options fall due; financial markets permitting.

CEDC is listed in New York, and its financials are consolidated in US$. Most of its operations are in Poland, plus now Russia; the Polish zloty has appreciated against the US$ by 15% in YTD 2008. On top of that, both of these markets are growing in double digits, with a clear premiumisation trend.

How long before the currency factor reverses, and the growth rates slow ? If a takeover bid does appear, once the bad debt fears get eased out of the system, then CEDC’s shareholders should be very open –minded. Unless of course China is the next big thing for the group’s management.

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THIS LEAD'S VALUATION
Size (€ mln) 120
Sector spirits
Asset Quality Russia no.1 sub-premium
Seller private
Buyer mid-cap plc
P/S 0,9
P/Ebitda n/a
Type equity value
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