Glenboden M & A Originations

Belvedere spirits group’s best rescue option could be acquisition by Bacardi

Priority Rating priority rating 5
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Origination Status financial re-organisation procedure upheld, October 2008
Asset Belvedere Group (France), leading branded spirits producer in Poland and France
Buyer candidates include Bacardi, Campari, Brown-Forman
Seller founders and public shareholders of Belvedere
Buyer Rationale global spirits consolidation, brand portfolio (global vodka, France Scotch whisky)
Seller Rationale acceptable valuation, solution to financial crisis
NBs Rouvroy and Trylinski family together own 35% of voting rights in Belvedere
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Belvedere is a mid-sized international spirits group, that has over-stretched itself in terms of indebtedness. The founders appear to have a number of options for a financial rescue, including selling non –core assets and bringing in a private equity investor. In our view however the timing is still favourable for the group to be sold outright, as a global spirits consolidation move. Valuations for premium spirits brands are still high, which might not be the case if the consumer trades down in 2009.

The jewel in Belvedere’s crown is its Polish vodkas business. The portfolio is centred around the Sobieski brand, which claims not only to be Poland’s best selling premium vodka, but also to be the no.7 global vodka in volume terms, and to have the second –highest growth rate within its peer group, at over 20%, behind Grey Goose.

The group also owns France’s no.1 Scotch whisky brand, William Peel, with the French market being the largest globally in volume terms in that category. Other attractions in the portfolio include no.1 or 2 market positions in the tequila, gin and porto categories in France.

Belvedere’s total revenues were over € 1 bln in 2007, with a forecast growth rate of 20% in 2008; the group also claims to be the no.7 global spirits group in volume terms.

The group’s vodka business now contributes over 60% of total revenues, and is the main driver of both growth and EBITDA. However, Belvedere’s wines business, which comprises 40% of sales in volume terms, is in decline and a drag on profitability.

For this and other reasons, the group’s EBITDA margin was only 4% in 2007, very low by industry standards; the forecast for 2008 is an uptick to only 5%. Connected to that, and to Belvedere’s acquisition history, net debt is unsustainably high, coming in at about x7 forecast EBITDA at the end of Q1 2008.

Triggered by a technical default on issued loan notes, and running the risk of forced repayment, the group has spent much of 2008 trying to reduce its debt and placate its creditors. Having so far excluded a capital increase on the public market, the owner-managers are considering options ranging from the sale of non –core assets, such as the international Marie Brizard business acquired in 2006, to bringing in an unnamed private equity investor for a minority shareholding.

It could be however that such options would be too little too late, and that the best long-term solution would be outright sale of the group to a strategic investor.

The Polish vodka portfolio, led by the Sobieski brand, accelerated its growth rate to over 50% in Q1 2008, and retains about 25% market share in that market. The Polish vodka market is one of the largest in the world, and Sobieski has global potential confirmed by a successful launch in the US and France in 2007.

These features make the portfolio an attractive acquisition candidate to a global player, especially one that’s already present in Poland but wishes to increase its scale there.

A year ago, Pernod Ricard was the obvious potential buyer, as its Wyborowa business languishes at under 5% market share in Poland, in spite of its large export component. However, having acquired Sweden’s V&S and its Absolut vodka brand in 2008, Pernod inherits that group’s Polmos Zielona Góra business in Poland, combined with whom it has both a market share of 15% and a major integration challenge.

Besides which, the high price paid by Pernod for Absolut has seen its own leverage ratio increase to x6 EBITDA, precluding the group from other significant acquisitions for a few years.

The other significant players already in the Polish vodka market are CEDC, Brown-Forman and Oaktree Capital. However, (i) Brown-Forman (through Finlandia Polska) is possibly too small in that market and unlikely to have the appetite for a major acquisition in Europe while the USD is still so weak; (ii) Oaktree Capital (through Polmos Lublin) is a financial investor likely to be looking for an exit in the near future; (iii) CEDC is conflicted out by the fact that it already has a combined market share in Poland of about 30%.

In this scenario, the most likely acquirer for Belvedere might be Bacardi.

That group was disappointed to lose in the tender to acquire Absolut, which as the no.2 global premium vodka might have fitted comfortably alongside Bacardi’s sup-premium offering Grey Goose. They still have the momentum for a significant brand acquisition elsewhere.

Earlier in Glenboden we tipped them as the most likely acquirer of Russia’s Stolichnaya, global no.3 premium vodka brand. However, if that brand is not for sale after all, then Sobieski would make a respectable albeit smaller Polish alternative, enhancing Bacardi’s overall global vodka ranking. Besides which, Belvedere’s French spirits’ portfolio has the same provenance as Grey Goose, which is also produced in France.

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THIS LEAD'S VALUATION
Size (€ mln) 1.200
Sector spirits
Asset Quality Poland no.1 branded
Seller mid-cap plc
Buyer large corporate
P/S 1,0
P/Ebitda 20,0
Type value estimate
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