CEDC losing bargaining power as debt deadline draws closer

CEDC losing bargaining power as debt deadline draws closer

Assurances and nuggets of optimism cannot hide the fact that Central European Distribution Corp is running out of options and needs to raise cash.

By its own admission, Central European Distribution Corp (CEDC) performed worse than expected in its largest market, Russia, during much of 2011. Added to that, poor sales for several brands in Poland led to a US$1bn impairment charge that dragged the distributor $1.3bn into the red for its full-year.

On top of that, CEDC conceded that it needs to source cash from outside of the business in order to service debt due a year from now. Moody's has had the drinks group on debt default watch since late last year.

At least liquidity isn't an immediate problem, according to CEDC's CEO, William Carey. The firm is confident of having enough working capital throughout 2012. 

That this was even in doubt tells us something about the extent of CEDC's difficulties. The larger issue is what the firm does now, in order to bring in cash. It insists that several options exist, although it remains unclear what these are. Carey told analysts on a conference call yesterday that investors should see some "solutions" in the "near-term", and certainly within the next six months. 

Perhaps other trade buyers or outside investors lie in wait. There is speculation as to the intentions of Mark Kaufman, the ex-CEO of CEDC-owned Whitehall Group, who bought a 9.6% stake in CEDC in 2011. Last week, Kaufman wrote an open letter to the firm, requesting an unspecified position on its board.

So far, though, the only concrete path laid down leads to the door of Russian Standard, which has offered to increase its stake in CEDC from 9.9% to close to 30%, in return for debt funding and distribution rights. Some analysts already suspect that Russian Standard may provide the only realistic opportunity for CEDC to avoid the break-up of its business.

With a low credit rating, a transparent need for cash and big losses that have wiped 20% off CEDC's share price in the last 24 hours, the company's bargaining position with potential investors appears to be limited.

Discussions with Russian Standard are ongoing, CEDC said yesterday. 

Carey told analysts that he broadly agrees with Russian Standard's founder, Roustam Tariko, that the two companies' portfolios are largely complementary in Russia. "It's quite positive the potential combination of those two portfolios," Carey said. 

Consolidation in Russia would also make sense in light of an increasingly harsh regulatory environment for vodka, spearheaded by excise tax rises. Vadim Dobris, director of the Russian research center Cifrra, told just-drinks late last year: “The minimum price for a half litre of vodka is US$4 now. In two years, this will be US$6.5." Consumption is subsequently expected to fall.

On yesterday's call, Carey said that valuation is the main sticking point between CEDC and Russian Standard. However, the longer talks go on, the weaker CEDC's position becomes.