Rustam Tariko will not be allowed into Forbes without vodka

Rustam Tariko, the second vodka producer in the world, Roust Corporation is selling the Polish subsidiary of CEDC for $1 billion, plans to pay off its debts and hold an IPO. Why does this not guarantee Tariko a return to the Forbes list and what could prevent the deal?

In the fall of 2011, the founder of the Russian Standard group, Rustam Tariko, whose fortune Forbes then estimated at $1.5 billion, bought his first stake (9.9%) in the Polish vodka producer Central European Distribution Corporation (CEDC). Ten years later, the Tariko Roust Corporation holding agreed to sell 100% of SEDC (the businessman consolidated the shares of the Polish company in 2013). The deal was announced by Roust itself. The buyer is the Polish manufacturer of food products Maspex – in Russia this company is known for the Tedi juice. The deal will amount to PLN 3.89 billion, which is approximately equal to $1 billion. But it still needs to be approved by the Polish regulatory authorities.

The last time Rustam Tariko was on the Forbes list was in 2015. What is the state of his business and what can a businessman expect after a major deal?

alcohol scale

Roust is the second vodka producer in the world after the British Diageo. Żubrówka vodka, produced by CEDC, is in the top 3 most popular vodka brands in the world along with Khortytsya and Smirnoff.

Since 2019, Roust has not published reports. Forbes reported that over 34.2 million 9-liter boxes of products were sold in 2020, and 15 million in the first two quarters of 2021. Gross revenue from sales in 85 countries in 2020 was more than $ 2.3 billion. The company did not disclose the volume of net sales – excluding excises.

In the report of the American investment bank Stifel, released in April 2020 (Forbes has a copy), it was stated that in the first three quarters of 2019, Roust’s revenue was $1.95 billion, and net sales were $794 million. Net sales in 2019 were $811 million

After the sale of CEDC, Roust’s business will face a significant reduction – a company representative told Forbes that the Polish subsidiary accounts for 54% of all revenue. For $1 billion, Maspex will receive two vodka distilleries, three licensed warehouses and a portfolio of Polish brands: Absolwent, Żubrówka, Bols, Royal and Soplica.

What is Tariko left with? A Roust spokesman said that after the deal, the group “will retain all of its Russian brands, including key global ones, such as Russian Standard, as well as other vodka brands that are leaders in their categories, including Talku, Parliament, “Green Mark”, “Cranes” and a number of others. Roust will also maintain a distribution portfolio of brands including Remy Cointreau, Jägermeister, EJ Gallo and others. “The deal will have a positive impact on the company’s Russian business. After a significant reduction in the debt burden, the company plans to focus on further growth of the Russian business and its global brands,” a company representative said.

Debt and IPO

The deal with Maspex will help Rustam Tariko significantly reduce Roust’s debt burden. Back in 2016, the businessman agreed on a restructuring with the holders of default Roust bonds for $650 million. As a result, the alcohol holding reduced its debt to $385 million, and the bondholders received 38.6% in the capital of Roust. The share of Tariko decreased to 61.4%.

Roust’s net debt was $759 million in 2019, Stifel said in a report. repaid in full.

One of the conditions for the restructuring in 2016 was the IPO of Roust within two to three years. Minority shareholders of the group then received the pre-emptive right to sell their shares. There was another agreement – if the holding enters an IPO or minority shareholders sell 90% of their shares at a time based on the company’s value of $899.4 million, Tariko will receive 2% of the newly issued shares as a reward. If the company’s value at the time of the transaction is higher, then Tariko will be able to claim another 3% (he will receive 1% of the shares for every $250 million increase in the company’s value).

Roust has already postponed its IPO twice, most recently in March 2020 at the height of the coronavirus pandemic. In April 2020, Interfax, citing a report by Russian Standard-Invest (controlled by Tariko and owning part of his stake in Roust), wrote that the IPO was scheduled for November 2021. Roust told Forbes that the group “continues to consider an IPO of the remaining alcohol business within 2-3 years after all planned initiatives to increase its profitability are implemented, which will be quite easy to do after such a significant reduction in debt, and also subject to favorable market conditions.

In the spring of 2020, Stifel estimated the possible cost of Roust (including CEDC) at only $105 million. True, the estimate was based on the lowest EV / EBITDA multiplier value among alcohol companies equal to 8 (Stock Spirits was used as an analogue). Other companies in the industry had significantly higher multiples at the time, such as Diageo’s EV/EBITDA of 17.73.

Russian problems

All the years that Tariko was on the Forbes list, his main asset, which provided a multi-billion dollar fortune, was not the alcohol business, but the Russian Standard Bank. In 2020, JP Morgan estimated the value of the bank (based on capital less intangible assets) at only 24.9 billion rubles.

At the same time, long-term litigation continues around the bank. Back in 2015, Tariko agreed with the holders of Russian Standard bonds for $550 million on restructuring. In exchange for two issues maturing in 2020 and 2024, investors received one issue maturing in 2022 with a 13% coupon. The issuer was an SPV company from the British Virgin Islands, Russian Standard Ltd. To secure this debt, Tariko provided a pledge – 49% of the shares of Russian Standard Bank. Already in 2017, Tariko defaulted on securities. Since then, the bondholders have been trying to recover the collateral.

In 2020, a shareholder and trustee of Citibank tried in a Russian court to recover 49% of the bank’s shares. But it failed in two instances – the court refused to recognize Citibank as a creditor, deciding that it was not a party to the securities agreement, but only a pledge holder. However, the lawsuit is far from over. In October 2021, the Arbitration Court of the Moscow District overturned the decisions of the courts of the first and appellate instances and sent the claim for a new trial, according to the file of arbitration cases. Shortly before this decision, the investment company A1, which is part of Alfa Group, declared itself the owner of more than 30% of defaulted bonds. At the same time, the interlocutor of RBC in A1 said that the debt of Russian Standard Ltd, taking into account the accumulated interest, is $ 850 million.

Can the litigation over Russian Standard bonds affect the deal between Roust and Maspex? The bank now owns about 28% of the Tariko alcohol company. A1 declined to comment on the sale of Roust’s alcohol business. A source familiar with the circumstances of the trial believes that the transaction will be challenged in the event of the bankruptcy of Russian Standard, for example, if the bankruptcy trustee represented by the DIA considers that as a result of the transaction, assets were withdrawn from the bank or an unequal counter performance was received for the asset. “Even without bankruptcy, the elimination of CEDC will significantly affect the balance sheet of Russian Standard. The recent victory of defaulted bond holders in the cassation and the imminent realization of collateral in respect of 49% of BRS shares will lead to the fact that the new owners of the block of shares will demand a review of the transaction or transfer of money to the bank. In any case, Tariko risks losing this money, ”says the Forbes interlocutor. Roust did not respond to a question by Forbes about whether litigation in Russia could affect the deal to sell the Polish business.