Beam defies takeover pessimists

When Beam Inc was separated from Fortune Brands in late 2011, speculation was widespread that it would become a takeover target, broken up and its brands such as Jim Beam, Maker’s Mark and Courvoisier split among the main global players.

But the American group’s progress over the past 18 months, as reflected in its latest quarterly figures, make that a distant prospect.

For the first three months of this year Beam easily beat analysts’ forecasts by posting an 8% increase in turnover over the same period in 2011, which itself was buoyant. For the full year the company said it expects profitability to grow at “a high single-digit rate”, which would put it on a faster growth pattern than both Diageo or Pernod Ricard are predicting, Meanwhile, it is improving its margins and driving down costs by about 2% a year at the same time generating free cash this year predicted at more than $300m.

The upshot is that Beam, which the market calculated would be worth about $8bn (£5.3bn) to a potential buyer only 18 months ago, is now valued by its share price at approaching $11bn. Shareholders would want a premium to convince them to sell so the potential price tag moves towards $13bn or more. Few companies could (or would want to) to join a break-up consortium at that level.

How has Beam put itself almost beyond reach? Chief executive Matt Shattock and his team have made full use of their independence and put in place a three-point plan that in reality is little different from their competitors’ – focus on premium brands such as Jim Beam, Makers Mark, Pinnacle vodka and Sauza tequila; drive into emerging markets; and innovate.

In addition, Beam itself has been on the takeover trail to widen its portfolio. It has bought Pinnacle vodka for $605m, the Cooley’s Irish whiskey brands for $95m and the Skinnygirl brand of low calorie wines and pre-mixed cocktails aimed at female drinkers for $8.1m. Despite the comparatively modest price, Skinnygirl has the potential to be Beam’s most exciting purchase as it introduces brand extensions across a variety of lines including vodka. Skinnygirl’s sales increased by 140% in the latest quarter.

Focus on what Beam calls its “Power Brands” means that while the North American spirits market grew by about 3% in 2012, Beam’s sales were 6% ahead, making the company the biggest gainer in that market. The company expects the global spirits market to grow by about 3% this year and predicts that it will outperform it.

The eponymous Jim Beam bourbon, which holds 30% of the global market in the category, is benefiting from a strong revival in demand in the segment, helped by the introduction of the Red Stag and Devil’s Cut varieties, and saw its sales jump by 10% last year. Meanwhile, after a very short-lived plan to dilute the product, Maker’s Mark has encountered a short-term supply problem driven by surging demand. Management regards this as a benefit as it will allow it to push prices up as it invests heavily and lays down extra spirit to mature.

Beam is being aggressively innovative in its home market. Shattock revealed with the latest results that the company had accelerated the launch of some new products into the first quarter [from later in the year] “as the effectiveness of our innovation capabilities enabled us to move quicker than we’d planned”.

Apart from line extensions to Jim Beam itself, it plans to drive double-digit growth this year for Pinnacle, the No 4 vodka in the US, in both the flavoured and unflavoured segments. Shattock reckons that only five years ago just 10% of all vodka sales were in the flavoured category but today it is one in six cases and soon it could be one in three.

There will be flavour extensions to Sauza tequila such as Sparkling Margarita and the development of Skinnygirl will continue – sales more than doubled in the first three months of this year on the back of new lines such as Mojito, Moscato and White Cherry vodka.

Although the lion’s share of Beam’s sales come from North America, new distribution arrangements in China have boosted turnover there by more than 50% (admittedly from a small base), while linking with Coca-Cola Amatil in Australia is paying off handsomely. Regulatory problems in India, which virtually brought the group’s sales to a standstill for part of last year, are being addressed and Beam now expects to push hard into the sub-Continent, especially with whisky, where its Teachers brand is a market leader. India accounts for just 2% of Beam’s sales.

Shattock told investors that he feels “very good about Beam’s growth strategy”.

“We feel very well positioned,” he said, “to continue outperforming our global market in 2013 and to drive sustainable, profitable long-term growth… We’re on track to deliver excellent full-year results.”