Patricia Koza in Poland -

The manic acquisition strategy of Central European Distribution Corp. has encountered a few problems recently, but many analysts are still bullish about the alcohol firm's prospects.

Central European Distribution Corp., a US-registered company that has built itself into the largest distributor of alcoholic beverages in Central Europe, has hit a bump in the road in its “buy-versus-build” strategy.

Analysts say it looks like CEDC’s offer to buy the 34% of shares it does not own in Polmos Bialystok, the number-two Polish vodka maker, is falling on deaf ears.

On October 23, CEDC announced it was offering PLN85.25 (€22.03) per share for Polmos Bialystok, in which it bought a 66% stake last year. The stock is currently trading at PLN84-85. The offer ends November 24.

The problem is that the NASDAQ-listed CEDC plans to float its own shares on the Warsaw Stock Exchange within two to five months.

“The market fears it wants to buy Polmos cheap and then offer its own shares relatively expensively,” said Lukasz Wachelko, an analyst with CA-IB in Warsaw. “In my opinion it’s a fair price, but there’s no premium. I think it’s quite probable this tender won’t be successful and CEDC will have to reconsider its offering.”

It has been a bad few weeks for CEDC, which has dramatically won a 35% share in both distribution of alcoholic beverages and manufacturing of vodka in the world’s fourth-largest vodka market under its determined chairman, president and CEO, William V. Carey.

In October, CEDC saw its hopes of acquiring another Polish distiller evaporate when regulatory authorities nixed the deal to buy Polmos Lublin on competition grounds. A US private equity fund, Oaktree Capital Management, swooped in and picked up Polmos Lublin for a reported PLN95m (€31.4m), admitting its move was “opportunistic.”

And on Tuesday, the firm announced its net profit for the third quarter came in at $11.7m, which was higher than the $6.5m recorded a year ago but lower than most people's forecasts. "Our first take on these figures is that we will need to trim our full year profit forecast of $53m, perhaps by 10-15%," says David Kadarauch, an analyst with Czech brokerage Wood & Co.

Nevertheless, analysts like Kadarauch are still bullish on CEDC, which in 15 years of rapid growth has acquired 15 distribution centres and 76 branches in Poland that supply more than 850 brands of alcoholic beverages to more than 39,000 outlets. It is the largest liquor importer as well, and last year became the largest vodka-maker in a country that trails only Russia, the US and Ukraine in vodka sales.

Teeing up the market

William Carey’s early career gave him little preparation for his current role as Poland’s vodka king. After gaining an economics degree from the University of Florida in 1987, Carey spent two years on the pro-golf circuit supported by his father, a Florida cattle rancher. That came to an end when dad told son it was time to go out and get a real job.

So in 1990 the younger Carey came to Warsaw to help set up an export operation for his father. That morphed into CEDC, whose strategy has been to acquire its strongest competitors but keep their managers. They in turn must be willing to accept the purchase price in cash and shares, and to continue working after the acquisition.

As CEDC romped through its acquisition spree, Carey realized that further growth would hinge on adding Poland’s national drink to the mix. So last year, CEDC spent over $300m to acquire 61% of state-owned Polmos Bialystok, Poland’s second-largest vodka distiller in a fierce bidding battle with the former Polish industry leader, Sobieski Dystrybucja, owned by France’s Belvedere. It subsequently raised its stake to 66%.

CEDC also purchased 100% of the French company Remy Cointreau’s vodka distilling arm in Poland, adding the number-three producer to its stable. Vodka now accounts for over 75% of sales.

Also in 2005, for the first time, CEDC went beyond Poland’s borders to acquire control of Bols Hungary. That gave the company Hungary’s top vodka brand, Royal Vodka, as well as major liquor imports into Hungary. CEDC issued $396m worth of Eurobonds to help finance the three acquisitions.

“They acquired Bols at reasonable multiples, then overpaid for Polmos, but they couldn’t let it go to Sobieski,” said CA-IB’s Wachelko. “The problem is holding their 35% market share both in manufacturing and distribution. The antimonopoly commission is not very friendly to them. And what’s left to buy?”

Swallowing half the market

There is indeed little opportunity to acquire more manufacturers in Poland, but there remain for the picking over 100 small distribution companies. Carey says his company plans to acquire such assets through 2007 with aggregate annualized revenue of $141m, as it seeks to push its market share to 50%.

Analysts say CEDC is attractive because it is in the unique position of distributing liquor from the rest of the world into Eastern Europe – unlike other alcoholic beverage makers, which export products to the rest of the world.

The numbers tell the story: net sales in 2005 were $750m, a 29% rise from the previous year; operating income topped $52m, a hefty 136% boost from 2004; and the compound average growth rate over the last five years is 43% for net sales and 81% for operating income.

Poland’s vodka volume sales are projected to grow almost 8% through 2010, clearing over 29m cases as the market matures, income levels rise and consumers “trade up” to premium brands, according to figures from Datamonitor. Marker researcher AC Nielsen says vodka accounts for 42% of Poland’s alcohol market by value, with beer making up about half.

Carey says the company will also continue searching for acquisitions elsewhere in the region, and is currently focusing on Ukraine. There is speculation CEDC may even be eyeing the Russian market. But analyst Wachelko warns: “Stepping on the foot of the big bear might be dangerous.”

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