Glenboden M & A Originations

Does CEDC have a better alternative to Russian Standard ?

Priority Rating priority rating 2
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Origination Status buyer proposal filed in US SEC, January 2012
Asset Central European Distribution Corporation (Poland), no.2 domestic vodka group and no.1 in segments in Russia
Buyer Russian Standard Corporation (Russia), domestic vodka, spirits distribution, banking and insurance group
Seller founders and public shareholders of CEDC
Buyer Rationale strategic alliance, vodka portfolio in Russia and Poland, regional expansion
Seller Rationale financial difficulties, debt restructuring, strategic alliance
NBs NASDAQ -listed CEDC also has leading market positions in its vodka segments in Russia and Hungary
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Financially weakened CEDC is being stalked by Russian Standard, who is offering to take a 33% stake and effective control of that group at arguably a reasonable valuation. A strategic alliance will be problematic between such diverse groups, but how attractive are CEDC's 'several' alternatives ?

Proposal summary ...Russian Standard offers to convert the 104 mln US$ in bonds that it holds in CEDC into new shares, to increase its stake from 10% to 25%. In the second step RS contributes its Roust Distribution premium spirits import business to CEDC as payment for another share issue to increase its stake to 33%.

Holding 10% of CEDC's shares, RS is already CEDC's largest shareholder. That group is a mostly free-float company, listed on NASDAQ and Poland's WSE.

Through this deal privately -held RS will gain de-facto control over CEDC, become a top three vodka player in Russia and Poland, and expand from super-premium into the mainstream and discount segments.

... CEDC financially vulnerable ...Even on a normalised EBITDA basis, CEDC's net debt ratio is very high (see profile). That debt includes US$ 300 mln of convertible bonds out until 2013, plus a furher US$ 900 in bonds redeemable in 2016.

On top of that, the group booked a massive impairment charge on its goodwill and brands in Q3 2011, plunging its operating profit into the red to the tune of over US$ 600 mln.

These problems largely stem from single-digit volume declines in vodka markets in Poland and Russia, and a price war in the former with its two main rivals, Stock and Sobieski.

... attractive deal for Russian Standard ...From a longer-term perspective, CEDC has leading brands and the no.2 position in the Polish market, with 24% share, claims the no.1 position in the mainstream and discount segments of the Russian vodka market, and a strong segment share and export share in Hungary and Ukraine respectively.

The Russian market is particularly exciting for RS, where it already claims the no.1 position in the (super) premium segment. That fragmented market is consolidating - CEDC predicts that the top 4-5 producers will increase their collective share from 50% to 80% in the coming years.

Converting about US$ 100 mln in bonds into another 15% of CEDC's share capital implies an enterprise value of roughly x14 normalised EBITDA (see valuation), which is arguably around 'fair value' for a group with CEDC's profile.

... strategic alliance a problemBoth sides talk of a strategic alliance, but major cultural differences exist between them. CEDC is a transparent publicly -listed group run by William Carey from Florida; RS is a privately -held company owned by Roustam Tariko from Tatarstan.

The business models are also very different. RS is a group that combines vodka and banking interests; meanwhile CEDC has grown by a string of complex acquisitions, financed on an arm's-length basis with corporate bond issues.

CEDC's management says that RS is one of 'several' options that the group has. Presumably he means acquisition by one of the global majors. It is questionable however whether any of these groups would match the RS deal at this time.

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THIS LEAD'S VALUATION
Size (€ mln) 1.350
Sector spirits (vodka)
Asset Quality Poland and Russia leader branded
Seller mid-sized plc
Buyer private corporate
P/S 2,1
P/Ebitda 14,0
Type enterprise value estimate
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