Suitors Prepare Ground for Long-Awaited Absolut Auction Process
Wednesday, 14 November 2007
London: Global spirits players have begun preparing the ground for the eagerly-awaited 7 billion usd-plus auction of Absolut vodka, which analysts believe will be done within the next 3 to 6 months.
Absolut parent company V&S Group is one of six companies the Swedish government announced in March it will be wholly or partially divesting its interest. While the Swedish finance ministry has steadfastly refused to put a timeframe to the privatisation processes, or indeed say in which order the companies will be privatised, Credit Suisse beverage analyst Michael Bleakley told Thomson Financial News he expects the sale is "going to be done in the next 3-6 months."
The Swedish authorities have said they are open to considering a possible stock market flotation of the business, but a trade sale is being viewed as the the most likely means to achieve the highest value.
"You get the industry to pay up for the business and the synergies going forward and you can get that without having to pay listing costs and listing fees," said Bleakley. "So why go for a two stage process when you can go for a one stage process?"
In a detailed note to investors, Credit Suisse said it expects the base valuation of the V&S business to be 7 billion usd, valuing the 10-million-case-selling brand Absolut at around 6 bln itself. Factoring in the cost of exiting V&S distribution arrangements which could be as much as 980 million usd, Credit Suisse said the total cost to the winner could be in the region of 8.4 bln.
V&S will be in London next week to present third quarter results to analysts, and while there is not expected to be a great deal of news of when the widely-anticipated auction process will start, the presentation will give the company an opportunity to maximise its value in they eyes of its international suitors -- including Diageo PLC, Pernod Ricard, Fortune Brands and Bacardi. V&S reported third quarter operating profit up 23 percent to 677 million skr, with chief executive Bengt Baron saying the performance of the V&S Absolut Spirits arm was "one of the best ever figures for a single quarter".
Diageo, Pernod, Fortune and Bacardi have all openly expressed their interest in taking part in an auction process for V&S, with Swedish private equity firm EQT also saying it is considering bidding for the distiller. In a note to investors, Credit Suisse said it expects 5-6 major spirits and beer players to be present at the beginning of the process, postulating that US brewer Anheuser-Busch may be interested in Absolut as it has been struggling with a spirits market that has been taking share away from beer.
While the potential suitors have said they have not been informed of a start to the proceedings, they have begun preparing the ground for a possible bid.
Late last month, Diageo launched and priced two tranches of 5- and 10-year bonds, the proceeds of which it said would be used for "general corporate purposes". Pernod Ricard, meanwhile, at its AGM earlier this month, asked for the authority to issue up to 5 billion usd in bonds, as well as 170 million eur of shares. It also gained approval to implement a two-for-one share split in January.
And on Monday, Fortune said it had agreed to sell its entire still wine operations to Constellation Brands in a deal worth 885 million usd, netting Fortune around 840 million after tax.
The group recognised that while its wine business -- including such brands as Clos du Bois and Geyser Peak and more than 600 hectares of vineyards -- is one of the most attractive in the US it said the deal would allow it to focus on the higher returns of the spirit segment.
A spokesman for Fortune said the sale results from a long-term strategic review of the wine business and is consistent with the group's strategy to position the businesses for higher returns.
"We've been very clear in both our level of interest in V&S and our confidence in financing a potential transaction, long before the sale of the wine business," he said, but declined to comment on how the group would intend to finance any possible deal.
He added: "The sale enables us to more intensely focus resources on the higher return premium spirits segment of our business and also enhances our financial flexibility to create value and continue developing our high return spirits business or pursue other kinds of opportunities."
Credit Suisse's Michael Bleakley believes the sale is an indication the group is "preparing the ground" for the Absolut auction, with Fortune Brands having the added advantage of not having to stump up the exit costs for V&S's international distribution agreement with Maxxium (in which Fortune is also and participant) and Future Brands (in which Fortune is the only other partner).
"They've got a billion dollar head start," said Bleakley. "But if the auction goes to the highest bidder -- which I think one has to read the Swedish Government would like to see -- then Fortune have got a point at which they have to leave the negotiation table in terms of not having quite as deep a pocket as some of the European players."
Bleakley believes that even after selling its wine operations and despite its 1 billion usd advantage, Fortune's net debt to EBITDA would be around 6 times, which he said is arguably too high. Pernod Ricard would also see its net debt to EBITDA ratio soar to 7.07 if it were to pay 8.4 billion usd for V&S.
The only company that would be able to justify the deal on its balance sheet, Credit Suiss argues, is Diageo which would have a net debt to EBITDA ratio of 3.53 if it paid 8.4 billion for Absolut.
Credit Suisse also that Diageo could meet a target 9 percent ROIC by year four, if it were to get synergies of around 300 million usd from the deal, while the other players may have to wait up to seven years to see a payback.
However, funding the deal will not be the only issue for the interested parties and achieving the highest price may not be the only concern for the Swedish authorities.
Competition concerns exist for all spirits industry players, with the exception of Fortune. Though Diageo will be keen to stress that Absolut and its 20 million case selling brand Smirnoff compete in different segments in order to circumvent competition issues, particularly in the US.
Credit Suisse said the Federal Trade Commission has been very consistent in stance by looking at potential sector market shares as opposed to total market shares both the formation of Diageo in 1997 and the later break-up of Seagram in partnership with Pernod Ricard.
It said it believes the Absolut acquisition will be treated in the same way by US authorities, with the best case scenario for the group being the commission splitting the vodka category by price-point.
Charles Stanley analyst Sam Hart acknowledged Diageo has an argument that it has a "slight gap in its portfolio" in the premium vodka segment.
The treatment of the category on price-point would mean, however, that Pernod Ricard would not be allowed to complete a deal without first disposing of its distribution rights to Russian brand Stolichnaya as its share of the imported vodka segment would be 52 percent.
Pernod has previously stated that it would be happy with one brand or the other but chairman and CEO Patrick Ricard said in September that the decision to pursue Absolut would be dependent on the group's negotiations to acquire Stolichnaya.
Speaking at a presentation for Pernod's full-year results, Ricard said Stolichnaya is the main priority because it is up for sale. Thomson Financial News understands the discussions to acquire the brand are continuing.
In Europe, Credit Suisse argues the European Commission is likely to focus on the total market share in Germany, Spain, Greece and the UK, rather than sub-category share, when making its decision.
It believes the commission may look at spikes in Spain and Greece, where Diageo's vodka market share would be over 50 percent following an acquisition, but said there are factors that could mitigate EU or local government regulatory decisions. It highlighted Heineken NV's 82 pct market share in the beer category but noted it was organic rather than acquisition driven.
It added from a total spirits market point of view, the potential change in market share is Spain and Greece -- 80 and 370 basis points respectively -- is fairly minimal, with the change in UK market share also only 80 basis points.
The Swedish Finance Ministry failed to respond to requests for comment on the status of the privatisation process, however minister Mats Odell has recently been reported as saying the process is going forward without problems and is in line with expectations.
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