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Bottoms Up -- And Profits, Too


After graduating from the University of Florida in 1988, William V. Carey hardly had the look of a future success story. First he tried to make it as a golf pro on the South Africa circuit and other small tours. But as Carey's golfing career floundered, his father told him to get a real job. So Carey decided to go to Poland, where Dad -- a Florida cattle rancher -- and a partner had put up money to start a small exporting business. "I was going to stay two or three months," Carey recalls with a laugh.

It was a smart stroke. Fifteen years later, Carey, 40, is at the helm of Central European Distribution Corp. () (CEDC), one of Poland's leading independent alcohol purveyors. After scooping up 15 small rivals, CEDC became a major player, handling in Poland such well-known brands as Jim Beam bourbon, Johnnie Walker Scotch whisky, and many popular Polish vodkas, including Sobieski.

Carey's knack for dealmaking has propelled CEDC, which is based in Warsaw but maintains U.S. offices in Bala Cynwyd, Pa., to the No. 11 slot on BusinessWeek's annual list of the 100 fastest-growing small companies. In the first half of this year sales rose 29%, to $314 million, and profits grew 34%, to $10.2 million. Over the past three years sales have grown 48% annually, on average, while net income has jumped 103% a year. In the past four years, CEDC's stock has returned an intoxicating 1,315%. That has pushed the value of the 2.8 million shares owned by Carey and his wife to upwards of $115 million.

Now, Carey is pouring capital into a risky new venture: manufacturing. On Aug. 17 he closed a $270 million deal to buy Poland's third-largest vodka distiller from French company R?my Cointreau Group () and an investment house. And CEDC recently announced it would spend $312 million for a 61% stake in government-owned Polmos Bialystok, Poland's second-largest vodka producer. If that deal closes in September as expected, CEDC will distill about one out of every three bottles of vodka manufactured in Poland. The deals push Carey into a business in which he has no proven track record. Still, many investors are betting he'll deliver. "He hasn't done too many acquisitions that haven't worked out," says James W. Oberweis, president of Oberweis Asset Management, which at last count held 1.1 million CEDC shares.

CARS AND BREWS

Carey has come a long way since 1990, when he arrived in Poland to help run the business his father funded, exporting cattle. When competition crushed margins, the company shut down the cattle business and began importing everything from used cars to Foster's beer. After realizing that the lager was what his Polish customers most coveted, Carey and his father's partner, fellow American Jeffrey Peterson, narrowed the product line to beer. The company then opened up several of its own distribution centers and expanded into wine and spirits. In 1997, Carey and Peterson decided to raise funds in an initial public offering so they could buy rival distributors.

CEDC was a tough sell. Carey and Peterson pounded on the doors of more than 20 investment banking houses in New York. All of them took a pass. "They didn't know Poland, and the business was small," Carey recalls. "We were ready to give up." Then New York investment banking boutique Brean Murray & Co. took a flier on Carey, helping him raise $10.6 million in an IPO in 1998.

DEBT WEIGHT

The company's acquisitions of Polmos Bialystok and R?my's vodka distilling arm in Poland will make it a powerhouse in the Polish liquor market. Furthermore, gross profit margins in distilling can climb above 60% -- vs. 12% or so in distribution, estimates First Albany Capital Inc. analyst Randall Scherago. And Carey says there are untapped opportunities in the businesses he's acquiring. Among them: exporting Bialystok's Zubrowka, a flavored vodka.

Still, the deals could produce a fierce hangover. CEDC issued $396 million worth of euro bonds to help finance the acquisitions. That's likely to push its net-debt-to-capital ratio from 22% in 2004 to 48% this year, estimates Avondale Partners analyst Douglas M. Lane. He believes CEDC will throw off $110 million in operating cash next year -- more than triple its interest expense. But skeptics say the rising interest, plus the challenges of integrating two acquired companies, may crimp earnings growth. "They lost their margin for error," warns Walter Ramsley, co-founder of money management firm Walrus Partners, which recently sold its CEDC shares.

At this stage, Carey is no longer backed up by his father, who died in a 1997 car crash. Carey says the success of CEDC was critical to proving himself to his dad. "Without it, I would have had a difficult time gaining his respect," he says. Now he must prove the new venture will be as profitable as the old.

By Amy Barrett in Philadelphia, with Bogdan Turek in Warsaw and Constance Faivre d'Arcier in Paris


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