Comment - Russian Standard throws CEDC a lifeline?

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Central European Distribution Corp is playing coy with the proposal of a strategic alliance from Russian Standard Vodka, but analysts believe that the drinks distributor needs a deal.


Shares in Central European Distribution Corp (CEDC) slipped back by 6% in early trading in the US today (9 December), but remained up by around 13% for the week. Excitement has overtaken investors since news emerged last week of Russian Standard's interest in the US-based, Eastern Europe-focused distributor.

A further rally was sparked yesterday after CEDC revealed that Russian Standard has proposed to buy a further 19.9% stake in the company, in exchange for unspecified assets in Russian Standard's Roust Inc spirit import unit. Late last month, Russian Standard bought a 9.9% stake in CEDC, the maxium allowed without triggering a 'poison pill' takeover defence.

While CEDC's management would only say yesterday that it is "evaluating the [latest] proposal", some analysts think that the group needs to a do a deal. Renaissance Capital said in a note: "We believe, for CEDC, this may be the last chance to save the company in its current state without selling the business in parts and focusing on operations, while the short-term debt pressure is relieved."

It said that a deal would offer CEDC a fresh credit line and "should also instigate significant improvements in CEDC's governance, in our view". For Russian Standard, meanwhile, a deal offers it a strong distribution and production capacity in Russia and in Eastern Europe more generally. It will also gain access to more brands, including Russian vodka brands such as Whitehall, currently owned by CEDC.

These are difficult times for CEDC. In October, it emerged that the company faces a class action lawsuit in the US, alleging that the firm misled investors over is true performance in Poland and Russia. "We believe the allegations are without merit and intend to vigorously defend ourselves," CEDC said in its third-quarter statement.

Meanwhile, the group has seen losses mount so far in 2011. For the nine months to the end of September, impairment charges of US$674.5m on the reduced value of brands and business were largely responsible for sending the group to net losses of $835.7m. Losses were $1.46m in the same period of 2010.  

Despite this, nine-month net sales rose by 24% to $597.5m, providing at least some relief to the business.

However, as Renaissance Capital points out in its note, 2012 is set to prove a volatile year for Russia's vodka market, a key component of CEDC's operations. Staged tax rises are set to increase vodka prices by around 70% over the next two years.      

For several reasons, then, forging stronger links with Russian Standard would seem to make sense. Mark Kaufman, the former CEO of CEDC-owned Whitehall Group and now with a 9.6% stake in CEDC, certainly thinks so.

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