Is Central European Distribution A Takeover Candidate?

| About: Central European (CEDC)

Central European Distribution Corp. (NASDAQ: CEDC) is one of the world's largest producers of vodka. CEDC is also Central and Eastern Europe's largest integrated spirit beverage company. CEDC is also a major player in Russia's vodka market.

Although Central European Distribution, which owns brands such as Green Mark, Absolwent and Zubrowka, has significant presence in Russia, the company has been struggling due to huge debt load. In addition, there are also concerns over the company's restatement of financials. In the last one year, CEDC shares have plunged more than 68% due to these issues. In fact, there have been concerns that the company may have to file for bankruptcy. However, recently, CEDC received a lifeline after it reached an agreement with Roustam Tariko, who is CEDC's largest shareholder and the founder of the company's rival Russian Standard vodka brand. The question is whether Tariko will now make a buyout offer for CEDC, given that the company's shares are so cheap.

Debt Problems

Central Distribution's biggest problem has been its massive debt load. At the end of the third quarter of 2012, the company had little over $100 million in cash on its balance sheet and more than $1 billion in debt. Last year, the company had acknowledged that it will struggle to deal with the maturity of $310 million in convertible debt in March 2013.

Restatement of Financials

Apart from the massive debt load, another major concern surrounding Central European Distribution has been the restatement of financial statements for 2010 and 2011. CEDC said in a filing in June last year that the financial statements for all financial reporting periods from and after January 1, 2010 should no longer be relied upon. The company noted in the filing that it will restate those financial statements to correct errors resulting from a failure to correctly account for certain retroactive trade rebates in respect of its net sales in its main operating subsidiary in Russia.

Agreement with Tariko

In May last year, a month before Central European Distribution announced that it will restate its financials, Tariko's Russian Standard bought 5.7 million shares of CEDC for approximately $30 million, or $5.25 per share. Even after the filing from CEDC in June last year that said that it will restate financial statements for 2010 and 2011, Russian Standard had shown interest in acquiring a bigger stake in CEDC.

The company said in a statement that Russian Standard signed an agreement to invest up to $210 million and as a result it will not have to worry about loans that were supposed to come due in March 2013. The news sent CEDC shares sharply higher as the company appeared to have arranged enough funding to stay afloat.

However, a month after CEDC restated its financial statements, Tariko threatened to walk away from the deal. In a letter published by the company in November last year, Tariko said that Russian Standard is no longer obligated to complete the pending strategic alliance after the company restated its financial results.

Following Tariko's threat, yields on CEDC's bonds due in December 2016 surged 676 points. The company was on the verge of collapse.

However, in December last year, Central European Distribution received a lifeline. The company agreed to a revise transaction with Russian Standard (through its affiliate Roust Trading Ltd.). Under the revised agreement, Russian Standard has given a renewed commitment to a strategic alliance with CEDC.

CEDC has agreed to cede operational control to Tariko and his company in exchange for $65 million in funding. The deal also provides CEDC with as much as $107 million in new capital.

The deal saw the creation of an Operational Management Committee of CEDC Board of Directors to be led by Tariko. The company also created a Restructuring Committee of the CEDC Board of Directors that will be led by non-Russian Standard directors. CEDC also appointed Grant Winterton as its CEO, effective January 10, 2013.

The deal addressed CEDC's near-term funding and operational issues.

Will Russian Standard Acquire CEDC?

With Tariko getting operational control of CEDC, the question is whether he will go for a buyout of the struggling company. CEDC shares are trading significantly below what Russian Standard had paid back in May last year to acquire 5.7 million shares. The only obstacle to a possible transaction could be the restructuring of CEDC's debt. The deal with Russian Standard permits CEDC to have restructuring discussions and negotiations with holders of CEDC's outstanding debt obligations. If the restructuring discussions progress well, Tariko may raise his stake in CEDC. A combination of Russian Standard and CEDC makes strategic sense in the increasingly competitive Russian market.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CEDC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.