Alcohol distributor expects acquisition spree to continue in 2000
Alcohol distributor Central European Distribution Corp. (CEDC) said last week that it plans to build on a 1999 buying spree next year with the acquisition of two or three distribution companies in the southeast to boost its market share to 20% of the domestic vodka distribution market.
Earlier this year, NASDAQ-listed CEDC purchased two distribution companies, and in early December announced it would buy western Polish operator Jama Company (JAC), which is expected to boost its sales by around $47 million.
"They have tremendous strength in the western part of the market," CEDC CEO Bill Carey said of the latest acquisition. CEDC expects to complete the purchase before the end of the first quarter next year.
CEDC is a leading importer of beer, wine and spirits. Additionally, it is the largest distributor of domestic vodka and currently holds a 10% share of this market. Its nearest competitor, Multi-Ex, accounts for 5% of the market, Carey said. The remainder of the market is fragmented with 8-10 companies occupying a 2-3% share each, followed by around 400 whose shares are 1% or lower.
So far, the mainstay of CEDC's business has been large cities, but with 1999's acquisitions, it has been reaching out into the country's smaller cities and rural areas. The company in March purchased Bialystok-based Multi Trade Company (MTC), a dominant distributor in the northeast for $2.9 million in cash and 254,230 shares of common stock. Two months later, it bought The Cellar of Fine Wines (CFW) for $1.8 million and 100,000 shares. By buying JAC for around $4 million in cash plus around 200,000 of its shares, CEDC now has access to cities such as Zielona Gora, Opole and Gorzow, Carey said.
"These are new areas in terms of distribution," he said. "We don't have our offices so far west as they do."
CEDC's total sales this year are forecast to grow 49% to $105.9 million, while it is predicted to net $3.1 million, up 51.6% from last year.
For the latest reporting period, CEDC nearly doubled revenue in the first nine months of this year to $63.4 million, compared to the same period in 1998. The company's operating margin held steady at about 3.7% in the first three quarters and net profit jumped nearly 63% to $1.4 million.
Despite the strong performance, the company's use of shares to pay for part of its acquisitions has diluted profit. Earnings per share (eps) during the first nine months of $0.35 was down slightly from eps of $0.38 in the same period last year.
While the company has yet to show that the acquisitions can ultimately improve operating margins, it has focused its energy so far on streamlining overhead and using a healthy cash position to boost the bottom line, Carey said. He added that the MTC purchase had helped to double CEDC's net margin within six months, to 1.7% today from less than 1% in March.
Carey would not say which companies CEDC intends to buy next, but added, "they are very large distributors in key areas where we don't have strength" in the southeast. The company hopes that by doing so it will double its market share.
"We're looking at 20% of domestic vodka distribution," Carey said.
The domestic vodka market is the fourth largest in the world, after the United States, Russia and Ukraine. However, the domestic industry, already having experienced a 12-13% decline in consumption rates last year on the back of shifting consumer tastes toward beer and a rise in smuggled spirit consumption, will feel the squeeze next year with the privatization of the 25 state-run Polmos distilleries.
What's more, the industry faces the implementation of new trademark rights that will relegate some of the Polmoses to loss-making brands and it is predicted that some of those distilleries will go bust.
However, Carey said there was no information at present on which companies will buy which Polmoses and how these changes will affect distributors. "It is too early to comment," he said.
