Glenboden M & A Originations

Acquisition of Svedka by Constellation Brands signals high valuations for new generation vodka brands

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Origination Status agreement for company acquisition announced, February 2007;
Asset ‘Svedka’ brand and business, imported premium vodka in US market;
Buyer Constellation Brands Inc (USA), leading international beverage alcohol producer;
Seller founder Guillaume Cuvelier, Alcofinance SA (Belgian private equity firm);
Buyer Rationale part of programme to expand imported premium white spirits portfolio;
Seller Rationale having big strategic partner to sustain growth to next level;
NBs deal will be EPS dilutive for buyer for three years;
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This acquisition has sparked controversy, because of its high valuation and the raunchy advertising that has propelled Svedka’s rapid success in the US. We think this deal might prove to be a failure, because Svedka doesn’t have true authenticity, its growth has been very spikey and its young target consumers may condemn it to being only a fad. But more broadly, the deal exemplifies a trend towards big players seeking out what they hope will be ‘the next big thing’ in vodka branding.

Guillaume Cuvelier, the ex-Hennessy executive who launched Svedka in 1998, knew that the marketing would have to be very aggressive and ‘eye-catching’ for the brand to break into the highly competitive US vodka market. Hence lots of celebrity product placement, and adverts that use sex liberally that have drawn criticism from within the industry. Obviously ‘no publicity is bad publicity’, if such controversy can lead to such a high valuation.

Svedka’s founder, its soul perhaps, is not Swedish. The production is outsourced and the company that directly owns it is a marketing entity. The brand is relatively new and, with 60% volume sales growth in 2006, sounds rather faddish. How many of the young adults, at whom the brand is targeted, will become loyal drinkers? How stretchable is a brand with that marketing profile beyond the USA?

What’s more, the language used by Constellation Brands to describe Svedka’s market position makes it sound very nichey – it’s ‘the 5th largest imported vodka brand with an 8% share of the imported vodka category’.

To put things in perspective, Svedka’s volume sales in 2006, at 1,1 mln cases, means it’s about 4% the size of Smirnoff. Is the Smirnoff brand worth $10 bln ? And that’s on a pro-rata basis; a brand valuation could give Smirnoff a risk-weighted premium over Svedka, one-for-one.

To be fair to CB, Svedka is apparently ‘the fastest-growing major premium imported vodka brand in the US’, and premium vodka is the place to invest in that spirits market, especially when CB’s existing value vodkas are in decline. But at what price?

Little financial information has been given out, so maybe part of the transaction value is contingent on future performance. The declaration that Svedka will remain an autonomous marketing and sales entity, within CB, supports this theory. And maybe, in the background, there’s a rock-solid strategy for Svedka to be the next Absolut.

There are curious parallels between the trend spotted in this deal, and that demonstrated in soft beverages by, for example, Coke’s acquisition of Fuze Beverage. In both cases we see big players buying exciting fledgling brands, and allowing them to remain autonomous, so as not to destroy their unique character within their bigger systems. The big challenge will be to sustain their growth and transform them from niche to mainstream.

To add a bizarre twist to this compelling story, the private equity firm that backed Mr Cuvelier in this venture, Alcofinance, specialises in businesses that produce and distribute ethanol. Svedka could be included, on a technicality, but presumably vodka is not exactly within the spirit of the firm’s eco-friendly mandate. Unlike of course the ethanol’s just part of the marketing story.

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THIS LEAD'S VALUATION
Size (€ mln) 295
Sector spirits
Asset Quality US no.5 branded
Seller private equity
Buyer large plc
P/S 5,0
P/Ebitda n/a
Type total consideration
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