Will Stock Spirits look to Hungary for its next M&A play?

Will Stock Spirits look to Hungary for its next M&A play?

With Stock Spirits still keen to increase its footprint in Central & Eastern Europe (CEE), which companies should it have on its shopping list? We present the case for Hungary's Zwack Unicum.

Market leader in adjacent geography ...

Stock's strategy is to be the leading spirits player in CEE. The company is already market leader in both Poland and Czech, with shares of 38% and 40%, respectively. It also has a significant presence in Slovakia, Croatia and Bosnia & Herzegovina. The company has long targeted more acquisitions in the region, seeing limited competition from the global spirits players there.

We believe that a geographic priority could be Hungary. Adjacent to Stock's existing footprint, with a population of circa 10m, it's larger than the other candidates (Slovakia, Serbia, etc). It also has quite a transparent business environment, compared with the Balkans.

According to Euromonitor, Zwack Unicum is the spirits market leader in Hungary, with 36% share. Stock's rival in CEE, Central European Distribution Corp, comes in second with 13%. Publicly-listed Unicum is 51% owned by the founding Zwack family, with Diageo holding a 26% stake and the remainder being free-float.

... portfolio and financial boxes ticked ...

Speaking to just-drinks earlier this month about the group's next acquisition, Stock's CEO, Chris Heath, said: "You're not necessarily dealing with people who are used to selling businesses." That's code for a company that is privately-controlled by, say, a family. Like the Zwacks.

Unicum's portfolio is weighted in coloured spirits like liqueurs, bitters, palinka. That's not necessarily a problem, as the trend in spirits in the region is towards flavoured beverages. Indeed, Stock has shown in other CEE markets that it is able to stretch its brands into new categories.

Unicum's sales are in slight mid-term decline; but that's common to spirits markets in CEE, owing largely to excise duty increases. What's positive is that the company is not falling as much as the Hungarian market in general. Also, Unicum's EBITDA margin, at 28% of net sales in its most recent three quarters is slightly above that of Stock (23% in FY 2014).

... issues with valuation and Diageo

An obvious problem could be price expectations. Stock might need to pay an EBITDA multiple in the region of 20x to convince the Zwacks to sell their controlling stake. That would mean Stock surrendering a lot of value from synergies and upside.

Then, there's the role of Diageo, with its 26% shareholding in Unicum, which might come with blocking rights. It seems, however, that Stock is able to co-exist peacefully in CEE with Diageo, as its successful distribution agreement in Czech demonstrates.

Besides, it appears that Diageo has no designs on acquiring any CEE player itself. If anything, the group is interested in acquiring premium brands, that fit its existing portfolio, rather than entire companies in that region.