No Pain, No Gain: US sale may turn out to be Blavod's hangover cure

Blavod Extreme Spirits is not a company many investors recognise. It is a miniature in a world dominated by mega-rich and powerful forces. Yet with a tiny capitalisation of just £3.7m it is – surprisingly – the second-largest wine and spirit group on the stock market. Number one, of course, is the awesome Diageo behemoth. It is valued at a cool £30.8bn.

Takeovers in the past few decades have decimated the ranks of the quoted drinks industry. Only a handful of brewers still enjoy a City presence, and with the disappearance in the past couple of years of Allied Domecq and Glenmorangie, investors with a taste for the hard stuff have felt obliged to alight on Diageo. Most overlooked the other option – little Blavod. They were right to do so.

In the past five years, shares of Diageo, which has recently rolled out profits of £2.1bn, have climbed from less than 700p to comfortably above 1,000p. In the same period, Blavod has slumped from 50p or so to a mere 5p as losses multiplied.

Indeed, for a time Blavod shares tottered along at an even more subdued 3.75p. Then, last week, they jumped to 5p after the group announced the sale of its American side to concentrate on its British-based operations.

It is the US undertaking that has eroded Blavod's early promise. When it arrived on AIM around the turn of the century, it was a rather intriguing proposition. Its claim to fame was black vodka, which had achieved fashionable appeal. The advertising man Mark Dorman had inspired the spirit, and the company formed to promote it was backed by Baron Eric de Rothschild (of Château Lafite fame) and headed by Allan Shiach, who had divided his time between film and TV scriptwriting and fronting the Macallan-Glenlivet Scotch whisky group. MacGlen, a quoted company, succumbed to the seemingly inevitable takeover strike.

Although tiny, Blavod seemed to be making headway. To increase its presence and strengthen its role in the important US market, it merged with a transatlantic group called Extreme Beverage Co. Run by Jeff Hopmayer, who became chief executive of the enlarged group, it produces such delights as flavoured rums and vodkas.

For a while all went relatively well. But increased sales produced little in the way of rewards, in spite of cash infusions. Eventually, it became clear that Blavod was too small to bridge the Atlantic. The shares started to decline.

For a time, they took on a slightly stronger appearance as the chance of a takeover materialised. But when the talks collapsed the slide resumed, taking the price down to 3.75p.

Now Blavod, which embraces some agencies such as Marie Brizard liqueurs and the Fernet Branca hangover drink, has returned to its pre-merger state. The American operation is being sold to Hopmayer for a little less than £400,000. He is taking on the US debts and retreating back across the Atlantic. It seems that running twin operations in Britain and the US was too "complex, cumbersome and costly" for a small-cap.

So what is left? In a sense, an even smaller company. But there are positive aspects to the deal. For one thing, Blavod is now debt-free. And its vodka, although still a marginal spirit player, enjoys something of a cult following. The agencies, too, although not top names, do not lack potential.

The chairman these days is Colin Campbell (ex-Moët Hennessy), and Richard Ambler is taking over from the departing Hopmayer as chief executive. An experienced drinks man, he was in charge before the unrewarding US invasion.

There is now little incentive for shareholders who have stuck with the group to bale out. Any sale should already have taken place. They are in a similar position to the No Pain, No Gain portfolio with its involvement in its basket case, Lennox Holdings.

Still, the slimmed-down, back-to-basics and probably profitable Blavod could carve out a rewarding niche for itself. But the best outcome would be a takeover bid. Even so, those heady days of 50p a shot are over.

Are the shares worth buying? Many investors like a realistic recovery play and Blavod could develop into an interesting tipple for the brave.

Lennox, by the way, is making progress but an upbeat message was rather blunted by the surprise resignation of the finance director Rolf Silver.