Glenboden M & A Originations

Is Belvedere about to undergo a debt for equity swap ?

Priority Rating priority rating 5
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Origination Status market rumours, November 2011
Asset Belvedere Group SA (France), mid -sized international spirits and wine producer
Buyer Oaktree Capital Management (USA), owner of Stock Spirits in CEE region
Seller Rouvroy and Trylinski families, Bruce Willis, public shareholders of Belvedere
Buyer Rationale stabilisation of Polish vodka market, growth of 'Sobieski' brand in US, re-sale to strategic investor
Seller Rationale debt mountain, non -sustainability as stand-alone entity
NBs new CEO of Belvedere has cited settlement with creditors as top priority
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The new CEO of financially stressed Belvedere, owner of 'Sobieski' vodka, has invited creditors, first of all Oaktree Capital Management, indirectly a large Belvedere bondholder, to the negotiating table. Does the solution lie in brand sales, as the CEO wants, or rather a debt for equity swap and merger with Stock Spirits, owned by Oaktree ?

Financial crisis dominates agenda ...Faced with bankruptcy, Belvedere underwent a legal 'safeguarding' action in France in 2009, superceded by a 'remedial' action in September 2011, to provide a breathing space from its creditors.

Time is however running out. Belvedere's net debt stood at about € 560 mln at the end of 2010, of which nearly all now falls due within less than one year, owing do covenant breaches. That compares with EBITDA in 2010 of less than € 2 mln.

The group's co-founder and new CEO, Krzysztof Trylinski, has made settlement with creditors as his top priority. In his view, the crisis can be resolved by selling two brands from the portfolio, which he claims is worth € 1 bln. We think that's optimistic.

... selling brands is not the way ...Broadly, 90% of Belvedere's business is derived in Poland ('Sobieski' premium and 'Krupnik' mainstream vodkas) and France (Marie Brizard spirits and wines). In 2010, those assets jointly delivered EBITDA of € 29 mln.

To clear debt of € 500 mln, those businesses would have to be sold for a historical EBITDA multiple of upwards of x20. On top of being doubtful - look at the long delay in selling the Marie Brizard portfolio - it would leave Belvedere with little more than 'Sobieski' vodka brand rights in the USA.

Glenboden amongst others has long said that Belvedere's chronically low EBITDA margin is the result of a lack of scale; the solution being for the group to be absorbed into a larger entity, that could stabilise the Polish vodka market and support 'Sobieski' to continue its double-digit growth in the US.

... key role of OaktreeTrylinski cites cutting a deal with Oaktree Capital Management, a major bondholder, as his top priority. Oaktree also owns Stock Spirits, which for some time has been in a price war with Belvedere in the Polish vodka market, dragging each other down through low-price brands like 'Czysta de Luxe' (Stock) and 'Krupnik' (Belvedere).

A merger between Stock Spirits and Belvedere would create an entity with over 40% vodka market share in Poland, and a broad portfolio that could be rationalised to maximise value going forward. It could mean however that Belvedere is acquired for little more than the value of its restructured debt.

Belvedere's share price has jumped on the Warsaw Stock Exchange. That suggests a deal might be in the works. Options include a merger -backed debt for equity swap with Oaktree and Stock, creating a new market leader with the stability to attract a global buyer like Diageo.

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THIS LEAD'S VALUATION
Size (€ mln) 560
Sector white spirits
Asset Quality Poland no.2 branded
Seller mid-cap plc
Buyer private equity
P/S n/a
P/Ebitda n/a
Type debt -equity swap estimate
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