SIGNPOST: CEDC downs Polish vodka maker at 3rd attempt

By bne IntelliNews February 14, 2007

Nicholas Watson in Prague -

The booze distributor Central European Distribution Corporation (CEDC) finally had some good news to announce when its third tender for the shares in Polish vodka maker Polmos Bialystok lifted its stake above the 90% level. However, the deal comes at a time when the vodka business is beginning to stagger a little as ethanol and grain prices soar.

The tender that will close February 15 was CEDC's third attempt to get above the 90% level from its original 69% shareholding, the first two tries having failed on price. This time CEDC offered PLN103 ($34.11) per share, which lifted its stake above the threshold necessary to allow it to de-list the vodka maker from the Warsaw Stock Exchange (WSE). Some 7% is held by employees.

Even so, many analysts feel the price CEDC eventually offered is still fair for the number-two Polish vodka maker, the first offer prices of PLN85 and PLN91 being rather cheeky attempts to get Polmos shares cheap, at the same time as it was planning offer its own shares relatively expensively in a secondary offering on the WSE. This it did in December, raising over PLN200m.

"The deal is marginally earnings-per-share accretive to CEDC in its first year," reckons David Kadarauch, an analyst with Prague-based brokerage Wood & Co.

The absorption of Polmos cements CEDC's position as the largest vodka producer in a country that trails only Russia, the US and Ukraine in vodka sales. In 15 years of rapid growth, CEDC is the biggest distributor and the leading importer of alcoholic beverages in Poland and Hungary, with brands in its stable such as Remy Martin, Jagermeister, Metaxa, Jim Beam, Sauza Tequila, Grant's and Guinness. In January, CEDC signed a deal to be the exclusive importer to Poland of the Gruppo Campari portfolio, which includes brands such as Campari, Cinzano, Skyy Vodka, Old Smuggler, Gran Cinzano, Cinzano Asti and Glen Grant.

The tender for Polmos, though, comes at a sticky time for the vodka business, which is already suffering from a widespread decline in consumption, especially by younger people who prefer lower-alcohol alternatives such as beer and wine.

Several analysts have recently drawn attention to the fact that margins from vodka making are set to fall as raw material prices of grain and ethanol rise. Vodka is basically ethanol purified by distillation from a fermented substance such as grain.

Gary Giblen, an equity analyst with the US brokerage Brean Murray, Carret & Co., says the price of ethanol, which accounts for roughly 66% of the cost of making vodka, has risen about 33%.

"The increase is quite hard to pass on, according to CEDC management and others, although our projections assume some pass on in the second half as well as some tempering of input pricing," says Giblen.

Likewise, Wood & Co's Kadarauch says rising grain prices of some 30% since the summer last year will put some $8m per year on CEDC's operating costs, which is equivalent to 8% of his estimated 2006 operating profit and 15% of net profit.

"Rising grain prices are a serious long term issue for vodka producers, and CEDC is looking to secure its future supplies with new strategies. Ukraine might feature in these plans," he says.

"We remain long terms buyers of the stock, although it is prudent to await the Q4 results announcement and conference call, due in about three weeks, rather than to buy today," he says.

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