U.S. Company on How to Go Broke Despite Dominating Vodka Sales in Russia; The company’s unlikely troubles show how timing and local knowledge are crucial

U.S. Company on How to Go Broke Selling Vodka in Russia

Going broke while dominating vodka sales in Russia and Poland may seem tough to do. A company founded by a Florida golfer, listed on Nasdaq Stock Market and until recently based in New Jersey, is almost there.

Unable to repay $258 million in bonds due last month, Central European Distribution Corp. (CEDC), which owns vodka brands including Bols, Zubrowka and Parliament and once imported Dom Perignon to Russia, is preparing to file for bankruptcy. Creditors will vote by April 4 on a restructuring plan that would hand CEDC to Russian billionaire Roustam Tariko, solidifying his control of the distiller and distributor he’s toyed with for years.

The company’s unlikely troubles show how timing and local knowledge are crucial. After almost two decades of success in Poland, CEDC expanded into Russia via acquisitions just as Poles began drinking less vodka and the Russian government raised taxes and costs to discourage alcohol consumption. The global financial crisis, a 37 percent collapse in Russia’s currency, and accounting errors that followed didn’t help either.

“If we had to do it over, we probably should have bought one company to see how it went, rather than buying three within six months,” CEDC co-founder William V. Carey, who resigned in July as chief executive officer, said in a phone interview from Warsaw, where he still lives. Russia’s “new regulations weren’t there when we invested, making it much more difficult to manage growth and profitability over the last three years.”Cattle V. Beer

Carey, 48, a University of Florida economics graduate, had moved to Poland after unsuccessfully pursuing professional golf. He set up a company in 1990 exporting cattle, soon shifting into the more lucrative business of importing beer to Poland from brewers including Anheuser-Busch and Foster’s Group Ltd.

CEDC listed on the Nasdaq in 1998 after an initial share sale that funded expansion into wine and other liquor distribution, according to its website. It began manufacturing with the company’s 2005 takeover of a distillery and Polish vodka brand Bols. While its operational base was in Warsaw, CEDC maintained official headquarters in Mount Laurel, New Jersey, to manage its U.S. listing until closing the small office just weeks ago.

Revenue (CEDC) peaked at $1.65 billion in 2008, the year Carey bet heavily on Russia, acquiring stakes in three other liquor groups within months, and agreeing to buy the rest over time.

Spending Spree

Carey spent about $1.2 billion in cash, stock and other securities to acquire Russian Alcohol Group, the largest vodka producer in Russia with brands including Green Mark and Zhuravli; Copecresto Enterprises Ltd., owner of Parliament, a top-selling vodka; and the Whitehall Group, an importer of premium drinks to Russia including Moet champagne and Hennessy cognac.

Then the party stopped. As global debt and equity markets reeled and the ruble plunged, drinking habits were also changing. Russians consumed 17 percent less vodka in 2011 than they did in 2008, while Poles cut back by 7.7 percent, based on volume sales compiled by International Wine & Spirit Research, known as IWSR.

Poles developed a taste for wine, beer, whiskey and lower- alcohol flavored vodkas. Much of Russia’s decline was driven by the Vladimir Putin-led government’s efforts to restrain alcohol consumption by raising taxes and prices, controlling raw- material supplies, curbing sales and banning advertising — market changes that boosted costs more than fourfold, Carey said. It drove more Russians to the black market where as much as half of the vodka consumed there is purchased, IWSR estimates.

Restating Earnings

The company reported a loss of $1.3 billion for 2011, writing down $1.06 billion in goodwill and brand value. Last year CEDC restated exaggerated earnings for 2010 and 2011, blaming managers at its Russian unit for failing to fully account for customer rebates, and replaced the executives.

At its peak in July 2008, CEDC shares traded at more than $75, giving the company a market value of $3.48 billion. Today they trade around 30 cents, and the company has about $1.38 billion of debt. Along the way, CEDC lost the right to import drinks to Russia from LVMH Moet Hennessy Louis Vuitton SA. (MC)

“They did too many acquisitions at the same time,” Moody’s Investors Service analyst Paolo Leschiutta said in a phone interview from Milan. “There was increasing competition in Poland, which was a distraction for the management because they focused more on Russia, and they didn’t realize that they were losing market share in Poland.”

Poised to Rule

Meanwhile, Tariko, who parlayed his Russian Standard premium vodka brand into a banking empire, has positioned himself to take ownership of CEDC. He’s been investing in the company’s troubled debt and stock since 2011, and through his Roust Trading Ltd. unit spent more than a year negotiating –and renegotiating — rescue offers.

Last month he won support from some CEDC bondholders and the company’s board for a revised restructuring plan, in which he would take ownership, forgive debt owed to Roust and partially repay other creditors in part with cash and new bonds. Tariko was named CEDC chairman after Carey left, and in September became interim president. By the end of 2012, he had operational oversight.

A rival bid led by fellow Russian billionaire Mikhail Fridman’s A1, CEDC shareholder and bond investor Mark Kaufman and SPI Group, which sells Stolichnaya vodka, was withdrawn last week, leaving Tariko’s plan unchallenged. He still needs overwhelming creditor support and a U.S. bankruptcy court to agree to his offer. Kaufman, who nominated Carey to return to the CEDC board, sold his Whitehall Group to the company in 2008.

Less Than Successful

“Very few people have been successful in the Russian alcohol business,” Kaufman said by phone before his rival consortium’s bid was withdrawn. “CEDC had a very successful business in Poland, but it’s not the same as Russia.”

Carey, who is working on a new business he declined to discuss, said he’s unlikely to tackle the Russian market any time soon.

“After living in Eastern Europe for 23 years, I’d certainly never say never — but I would prefer further west,” he said.

To contact the reporter on this story: Beth Jinks in New York at bjinks1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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