By Maria Ermakova

OAO Deka, Russia’s second-largest maker of the traditional soft drink kvas, may sell a stake of about 25 percent as it fights inroads by Coca-Cola Co. and Carlsberg A/S’s OAO Baltika Breweries in the local market.

Deka is playing on patriotism and increased beer taxes to lure customers to its Nikola brand of the fermented beverage. Kvas is made from bread or malt and can be flavored with sugar, birch sap and fruit. It’s naturally bubbly and contains negligible amounts of alcohol.

“Our goal is leadership in this highly competitive market,” Chairman Andrei Mansky, who is also Deka’s co-owner, said in an interview in Moscow. “Coca-Cola and Baltika have a big potential, and if they would be ready to spend big money, they could achieve some meaningful market share.”

Russian sales of kvas are expected to rise about 15 percent annually over the next five years to more than $1 billion in 2015, Mansky said. Carlsberg, the nation’s biggest brewer, diversified away from its Baltika beer brand by starting kvas production this year. Coca-Cola began making the brew under the name Kruzhka & Bochka, or “Mug & Barrel,” in April 2008.

Deka has 31 percent of the market, compared with 37 percent for Ochakovo. Coca-Cola, the world’s largest soft-drink company, and Baltika have a combined 10 percent.

Investment would most likely come from “some wealthy individual, rather than a private equity fund,” said Irina Yarotskaya, an analyst at Otkritie Financial Corp. in Moscow. “Private equity funds usually buy stakes to be able to sell them back later at a higher price. It’s not for sure they’ll be able to do it with a kvas producer.”

‘Not Cola’

Nikola was the fifth most-recognized brand of carbonated drink in Russia last year, after Coca-Cola, Pepsi, Fanta and Sprite, according to the company. Deka came up with the name “to oppose imported drinks such as Coca-Cola,” Mansky said.

The company uses the advertising slogan “Kvas Is Not Cola, Drink Nikola.”

“Kvas is the national Russian drink and has been produced for at least 1,000 years,” Mansky said. “Everyone has a memory of kvas being made in his family.”

Deka was founded in 1992 when the 19th century brewery in Veliky Novgorod, southwest of St. Petersburg, was privatized. Mansky and partner Konstantin Barinov bought control of the company in 2001. They took full control in 2004 and started producing kvas the next year. The company continues to make beer, which accounts for about 25 percent of its revenue.

Beer Tax

Russia has proposed tripling the beer tax and banning the sale of beer in kiosks and outdoor retail markets to curb what President Dmitry Medvedev calls the country’s “colossal” alcohol consumption.

“Considering the government is conducting an anti-alcohol campaign, including against beer consumption, it’s possible that some of those non-heavy drinkers may switch to kvas,” said Maria Sulima, an analyst at IFC Metropol in Moscow. “It’s a very Russian product and quite a popular one.”

Deka would use some of the money raised in a stake sale to boost advertising, improve distribution and pay down debt, Mansky said. He didn’t say how much the company might raise.

Deka is rebuilding its sales network after some distributors went out of business in the credit crunch. Revenue may fall 20 percent to 1.5 billion rubles ($51 million) this year because of the disruption, according to Mansky. The beverage maker has started selling directly to retailers to recover lost revenue, he said.

Sales Growth

“We are at the initial stage of the kvas market development,” he said. “Russians consume just 4 liters of kvas per person a year.”

In 2010, Deka forecasts sales will rise 35 percent to 2.02 billion rubles, helped by the “market’s recovery” and its purchase of the Stepan Timofeevich brand from Heineken NV in September, Mansky said.

Sulima estimates sales will rise 20 percent to 22 percent next year, calling the 35 percent forecast too optimistic.

“To achieve that, they would have to raise production volumes by at least 10 percent and raise prices by about 20 percent, which is quite a lot.”

Earnings before interest, taxes, depreciation and amortization will rise 6 percent to 250 million rubles this year and will reach 300 million rubles in 2010, the company estimates. The margin of Ebitda as a percentage of sales will expand to 16.3 percent this year from 12 percent in 2008, after Deka reduced spending on television advertising and focused on marketing its product to retail chains, Mansky said.