OREANDA-NEWS. November 18, 2009. CEDC will increase its stake in the Russian Alcohol Group (RAG) to 100% in 2009, agreeing to purchase the remaining 37.8% interest from Lion Capital (and other private equity firms) for US510m., reported the press-centre of OTKRITIE Financial Corporation.

CEDC also intends to refinance some US 300m of RAG debts. In order to complete the acquisition of RAG, CEDC will offer 9.5m new shares (or 10.5m with greenshoe). This represents an 18% increase in shareholder capital. It also plans to issue US 870m in senior secured notes, due in 2016.

View: Consolidation of a100% interest in RAG, which translates into full operational and financial control over the group, is positive news for CEDC. The transaction will allow the group to focus more on operational issues, providing investors with clarity. Refinancing expensive debts in Russia is also positive since it will lower the cost of debt (and extend its maturity), yielding a comfortable level of debt service.

We believe the offering will come at a slight discount to the current share price levels, and a US 30- US 31.5/share price range is the level at which investors should participate in the offering. This price range implies a 2010 EV/EBITDA post money valuation of 9.9x-10.12x, which is a 4-7% discount to the trading multiples of DM peers.

Valuation: The stock trades at a 2010 EV/EBITDA of 8.4x (pre money), which is a 24% discount to DM peers.

Action: We advise clients to participate in the offering at the price range of US 30- US 31.5/share.