Glenboden M & A Originations

Belvedere can't continue alone and should join a bigger group

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Origination Status proprietory origination, May 2010
Asset Belvedere Group SA (France), mid -sized international spirits and wine producer
Buyer candidates include Pernod Ricard, Bacardi, United Spirits, Suntory
Seller Rouvroy and Trylinski families, Bruce Willis, public shareholders of Belvedere
Buyer Rationale leading Polish vodka brand, US vodka market growth potential
Seller Rationale non -sustainability as stand-alone entity
NBs 'Sobieski' vodka sales volume doubled in the US in 2009
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Belvedere, the French spirits group, has escaped liquidation through a debt restructuring. However, we believe it has a fundamental problem with profitability, and should 'grab victory from the jaws of defeat', by pegging its flagship 'Sobieski' vodka brand to a bigger group. There are a number of potential acquirers.

Family business in Poland and France ...Belvedere was established in the early 1990s by two families - the Rouvrays from France and the Polish Trylinskis - who still effectively control the business through jointly holding 44% of the voting shares of that public group.

Belvedere's main markets are Poland, which delivers 35% of its sales revenue, principally Sobieski vodka; then France, which accounts for 30% of sales, mostly from various wine brands; also the US, bringing nearly 20% of revenue, mainly thanks to Sobieski from Poland.

... one key vodka brand ...The jewel in Belvedere's crown is Sobieski, which delivers over 50% of total revenue. It's a leading brand in Poland, with over 10% market share. It's also making headway in the US, partly thanks to a marketing campaign fronted by the actor Bruce Willis.

... debt, sales and profit problems ...Belvedere's finances however are in a mess. It has a huge debt burden (see chart), which caused the group to undertake a legal 'safeguarding' action in France, from which a debt rescheduling resulted, giving the group some breathing space.

2009 was a disastrous year for Belvedere, with sales revenue declining by over 25%, thanks to the devaluation of the Polish zloty, the fallout from the safeguard action, and tough market conditions.

That result, and a loss in 2009 even at the EBITDA level, can be said to have been exceptional. The group after all has a medium-term CAGR that is quite positive (see chart).

However, Belvedere also has a chronic problem with profitability; its EBITDA margin in the two years previous to 2009 was, respectively, only 3% and 6%, which is very low by industry standards.

... basic lack of scale ...Although that problem could be put down to the heavy weighting of Belvedere's low-margin wine business in France, we believe that fundamentally the group is too small to succeed as an international spirits business; it's almost a 'one brand company', with Sobieski being so important to it.

Belvedere's big sales decline in 2009 was in spite of major promotional spending behind Sobieski; a classic sign of lack of scale.

... non -core disposals not the answer ...Time is not on Belvedere's side. Besides the time bomb of the rescheduled debt mountain, Sobieski is in decline in its domestic market; having been Poland's best selling premium vodka, with over 20% market share in 2008, its share had nearly halved by Q1 2010.

Attempting to salvage itself, Belvedere has put up for sale its 'Marie Brizard' liqueurs and Polish distributors businesses. The disposal of these operations, defined as discontinued by the group (see chart), is set to be completed by mid -2010; there are at least four bidders for Marie Brizard..

However this is not the solution for Belvedere. None of those bidders are top -dollar paying majors; the list includes ThaiBev, Quartier Francais, La Martiniquaise and the Russian Israeli Mark Kaufman.

In addition, the group itself seems to be anticipating a low valuation for Marie Brizard; its P&L for 2009 includes an impairment charge from to-be discontinued operations of € 140 mln.

... sale of core business with Sobieski story in USWe believe that Belvedere should be sold by its owners, before Sobieski declines in Poland much further, and before a liquidator sells off the group in parts in future.

The hook for a potential buyer is Sobieski's US sales, which doubled in 2009 and increased by nearly 30% in Q1 2010 (over Q1 2009).

That's admittedly from a low base, since Sobieski was only launched in that market in 2006. On the other hand, at 576.000 cases, that brand's volume sales in the US are more than half of those of e.g. Svedka vodka, when it was bought by Constellation Brands in 2007 for a sales multiple that some analysts estimated at x5.

Potential buyers even now ...In terms of potential buyers, and although this is not the best time given the finances of global spirits players, we believe there are acquirers out there for a mid -sized asset like Belvedere, that isn't highly valued on the basis of its share price (see valuation).

Pernod could be interested ...We'd start with Pernod Ricard. Its Wyborowa business in Poland is languishing at 10% market share, putting it in the no.4 spot. By acquiring Belvedere, that group's share in Poland, a major vodka market, would increase to about 25%, placing it in second place after Polmos Lublin.

Purists might say that, for export markets, Pernod already has a premium Polish vodka in its portfolio, 'Wyborowa', and doesn't need a second one.

On the other hand, having both brands might allow Pernod to conquer and protect emerging markets. Take China; Belvedere is building a sales organisation there, to launch Sobieski. That poses a threat to Wyborowa, the no.2 imported vodka brand in that huge potential market.

It's true that, in the wake of its massive acquisition of 'Absolut' vodka in 2008, Pernod's net debt burden is still quite high, at x5,5 EBITDA at the end of 2009. On the other hand, that group has strong cashflow generation and undrawn credit lines of nearly € 2 bln; Belvedere is affordable in that context (see valuation).

... Bacardi another option ...Another potential acquirer, which Glenboden has paired with Belvedere in the past, is Bacardi. That group lost in the tender to acquire Absolut, and has been unsuccessful in its attempts to buy 'Stolichnaya' vodka in Russia. Sobieski could fit comfortably alongside Bacardi’s super-premium vodka offering, 'Grey Goose'.

... possibly an emerging market acquirerOther bidders include United Spirits from India, and Suntory from Japan. Both of those groups are acquisitive of European drinks brands (viz. White & Mackay and Orangina deals).

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THIS LEAD'S VALUATION
Size (€ mln) 620
Sector spirits (vodka)
Asset Quality Poland no.3 branded
Seller mid-cap plc
Buyer large plc
P/S 1,0
P/Ebitda n/a
Type enterprise value estimate
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