Sell Central European Distribution (CEDC) in my long-term Jubak Picks 50 portfolio
01/18/2012 6:06 pm EST
Why sell now? The stock lost 80.9% in 2011 so why not hold on for a turnaround?
I advised selling the stock back on November 29 http://jubakpicks.com/2011/11/29/update-central-european-distribution-cedc-3/ when it had climbed 47% from its November 11 low. (Unfortunately, the rules of my Jubak Picks 50 portfolio only let me sell once a year in January so in that portfolio I had to hold on for another month and a half.) Then it looked like the company was in play, but I had my doubts that any acquisition would do much for existing shareholders. That suspicion has only become stronger now that specific deals have started to materialize. For example, Roustam Tariko, who acquired 9.9% of Central European Distribution in November, has proposed “helping” the company restructure by integrating its distribution business with that of his company, Russian Standard. The price of this help would be issuing new shares to Russian Standard equal to about 20% of outstanding shares.
That seems a bit rich for a deal that combines distribution systems. And it makes me very uneasy about the fate of minority shareholders in Central European Distribution. It doesn’t do an investor much good if a company is saved but his shares get diluted like bad vodka.
Not that Central European Distribution doesn’t need help. The company’s strategy to build market share in the distribution of vodka and other liquors in Poland, Russia, and the rest of Eastern Europe by acquisitions went haywire in 2011-2011. The company wound up acquiring brands for the sake of acquiring brands and the result was a stable of labels that all too often competed with itself. Unfortunately for the company’s ability to recover from this mis-step, its early success has validated the attractiveness of this market to the extent that bigger liquor producers and distributors are moving in. I think Central European Distribution can sell out to a bigger competitor—at what price will be the issue for existing shareholders--but I don’t think it can recover to take advantage of rising incomes and rising consumption in Eastern Europe.
Even with an acquisition possible, I still call this one a sell.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Central European Distribution as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/