Glenboden M & A Originations

Who is Stock Spirits trying to acquire in central Europe ?

Priority Rating priority rating 5
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Origination Status proprietory origination, March 2015
Asset Zwack Unicum plc (Hungary), leading domestic spirits producer
Buyer Stock Spirits plc (UK), leading spirits producer in CEE
Seller Zwack family, Diageo plc and public shareholders of Zwack Unicum
Buyer Rationale expansion of market leadership in CEE region
Seller Rationale attractive valuation
NBs Diageo holds a 26% shareholding in Zwack Unicum
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We present the case for Zwack Unicum being a priority acquisition target for Stock Spirits in CEE, even though Hungary is not the largest market in that region.

Market leader in adjacent geography ...Stock's strategy is to be the leading spirits player in CEE. It's already market leader in both Poland and the Czech Republic, with shares of 38% and 40% respectively. It also has a significant presence in Slovakia, Croatia and Bosnia & Herzegovina. It aims to make more acquisitions in the region, seeing limited competition from the global spirits players there.

We believe that the geographic priority could be Hungary. Adjacent to Stock's existing footprint, it has a population of cca. 10 mln, which is larger than the other candidates (Slovenia, Serbia etc). It also has a relatively transparent business environment, compared with the Balkans.

According to Euromonitor (2013), the spirits market leader in Hungary is Zwack Unicum, with 36% share; ahead of CEDC, Stock's arch-rival in CEE, at 13%. Publicly -listed Unicum is 51% owned by the founding Zwack family, with Diageo at 26% and the remainder being free -float.

... portfolio and financial boxes ticked ...In a recent interview Stock's CEO said, when questioned about the group's next acquisition, that 'you're not necessarily dealing with people who are used to selling busineses'. In the M&A world that's code for when the potential seller is a family, like the Zwacks.

Unicum's portfolio is weighted in coloured spirits like liqueurs, bitters, palinka. That's not necessarily a problem, as the trend in spirits is towards flavoured beverages, and Stock has shown in other CE markets that it's able to stretch brands into new spirits categories.

Unicum's sales are in slight decline mid-term; but that's common to spirits markets in CEE, owing largely to excise duty increases. What's positive is that it's not falling as much as the Hungarian market in general. Also, Unicum's EBITDA margin, at 28% of net sales in QI-III 2015, is slightly above that of Stock (23% in FY 2014).

... issues with valuation and DiageoAn obvious problem could be price expectations. Stock would likely need to pay an EBITDA multiple in the region of x20, to convince the Zwacks to sell their controlling stake. That might mean Stock surrendering a lot of value from synergies and upside.

Then there's the role of Diageo, with its 26% shareholding in Unicum, which likely comes with blocking rights. It seems however that Stock is able to co-exist quite peacefully in CEE with Diageo; their distribution agreement in the neighbouring Czech Republic has just successfully completed its first full year.

Besides, it appears that Diageo has no designs on acquiring any CEE player itself. If anything, the group is interested in acquiring premium brands, that fit its existing portfolio, rather than entire companies in that region.

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Size (€ mln) 300
Sector spirits
Asset Quality Hungary no. 1 branded
Seller mid-cap plc
Buyer mid-cap plc
P/S 6,0
P/Ebitda 20
Type enterprise value estimate
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