Citigroup's Beverages team is out with some interesting comments on Central European Distribution (NASDAQ:CEDC), noting the Russian newspaper Kommersant has a front-page article this morning saying that CEDC is in merger talks with Vasiliy Anisimov and Rosspirtprom to combine their respective Russian assets into a single organisation.
According to the article, the discussion is around Anisimov receiving a 20% stake in CEDC in exchange for his various Russian alcohol assets (86% of Moscow vodka factory Kristal, VEDK distribution business with the exclusive distribution contract on the popular brand “Putinka”). A third party in the deal is reportedly Rosspirtprom, under whose umbrella the combined Russian assets would be managed. According to data in Kommersant, this would potentially increase CEDC’s market share from 14% to ~21%. None of the parties involved have commented on the press report.
According to Citi, this is not the first public speculation over a deal for CEDC and may not be the last given the difficult position the company finds itself in due to a combination of an underperforming operational business and a stretched balance sheet. Previously the stock has reacted positively to press speculation of acquisition (press reports of a $17/share offer by Roman Abramovich in May that an Abramovich spokesman later denied) or to investors building a large stake (Mark Kaufmann issued an SEC filing recently saying he had acquired 9.6% of the company). Last week CEDC’s Board of Directors adopted a “poison pill” giving it power to significantly dilute any potential unfriendly buyer, which could be taken as a sign the BoD has other plans for regaining investor confidence.
While it would be too early to make a fundamental analysis based on the details available, Citi's initial impression is that if such a deal is under consideration, it sees more positives than negatives.
- First, this may solve CEDC’s Russian performance issues through the return of key managers who built the core Russian Alcohol Group (RAG), which CEDC acquired in 2008 (but who now, according to Kommersant, work for VEDK and Rosspirtprom). While they do not know the two managers in question they believe this change would be taken positively by the market considering the visible success of initially building the RAG business (and subsequent decline once these managers left).
- Second, the combination of improved consolidated cash flows and the return of these key managers would in our view significantly improve the company’s chances of meeting a major re-financing challenge in March 2013, when $300mln in convertible bonds comes due.
CEDC has been beaten to bits following 3 disappointing quarters and I suspect that any change in leadership and operations will be welcomed by investors.
Rememeber, this was a $26 stock mere 8 months ago. Gaining 28% market share in the Russian Vodka market? That's fairly significant. #1 player.
CEDC produced a 50%+ move on August 29 following the Kaufmann stake news, which means it's a mover.
I'm guessing CEDC will see $7.50-8.00+ on this.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.