Stock Spirits – A More Direct Approach

I have commented on the affairs of Lakehouse recently where disgruntled major investors have requisitioned an EGM to replace all the non-executive directors. One commentator asked why the investors did not try to change the CEO also. A more direct approach is being taken at Stock Spirits (STCK) where concerned shareholder Western Gate Private Investment, who own 9% of the company, have submitted a requisition to remove the CEO, Chris Heath, and also appoint two new experienced non-executive directors.

Stock Spirits is a producer and distributor of vodka and other spirits. Revenue last year was €263 million to the end of December, but that was down from €293 million in the prior year and post tax profits were down by 46%. The company has a strong focus on Poland and other eastern European markets and even more disconcerting was that in Poland their market share declined from 38.1% to 30.9%. The reason for this decline is not made clear by the company but it has been suggested that this is due to poor management. Rapid turnover of regional managers and the lack of a dedicated CEO in Poland is alleged to have contributed to the problems. Western Gate are also concerned about the level of M&A activity in the company and wish to have that put on hold pending a board review.

Stock Spirits is a main market company which listed in October 2013 at a price of 235p. After a rise to 315p in the following months it is now back down at 145p at the time of writing. Before the IPO it was previously controlled by Oaktree Capital Management, a private equity investor. As a result it still has considerable debt although that was reduced last year.

Despite the fact that the company mainly operates in Eastern Europe, the management is based in the UK and the board is mainly English. One of the complaints of Western Gate is that this has resulted in very high costs with corporate costs of €16.7m in 2015 which is 31% of EBITDA. They certainly produced a very impressive Annual Report in the previous year which looks more like that of a FTSE-100 company than that of a company with a market cap of £291m.

Another complaint is very high board remuneration levels, despite the poor performance since the IPO. Chris Heath, the CEO, was reported as receiving a “single figure remuneration” of £831,000 for 2014 and £2,846,000 in 2013.

Western Gate is the family office of Luis Amaral who just happens to be the largest shareholder and CEO of Eurocash S.A. which is a major customer of Stock Spirits. Mr Amaral suggested that it was in the interests of Eurocash to have a stronger Stock Spirits rather than having to rely on their competitors, apart from his investment in Stock Spirits.

Western Gate wish the company to remove the CEO and hire an executive search firm to look for a new one as soon as possible. However the two non-execs they are proposing do have extensive management experience in the drinks industry.

Note that Stock Spirits changed their auditors in April 2015. That may be due to good reasons but it is something that is often of concern to investors. Drinks companies are not immune to manipulation of their accounts with “channel stuffing” being one thing to look out for.

Comment: The severe loss of market share is clearly one of the major reasons for the decline in profitability. Running a spirits business is very much about “brand management” as any holder of Diageo for example will be well aware. That is particularly the case for vodka as switching brands may be even more likely if prices are uncompetitive or marketing (and the maintenance of “brand awareness”) becomes less effective. Having management operate close to local markets and understanding their dynamics is surely essential.

Perhaps this is a case of the previous owner maximising profits for the short term so as to maximise the IPO price and reducing marketing spend? Even if that is so, it is certainly not clear how the company is to rebuild its market share from the announcements it has issued.

So in essence Western Gate seem to have a point although I would not want to come to a conclusion without seeing the response from the company first. But as I said at a recent event on shareholder activism organised by the Investor Relations Society, I have never known a case of shareholder activism that did not have a positive effect on the affairs of a company even if there is no immediate resolution.

Roger Lawson

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