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Friday 25 April 2014

Suntory eyes the big league

31st January, 2014 by Ron Emler

Beam’s shareholders must be beaming. For years a division of the underperforming Fortune Brands, it became a separate company two years ago, since when the share price has doubled to $83.50.

BeamBeam’s shareholders are guaranteed to pocket at least that because of the agreed $16 billion unsolicited bid from Suntory, which was 25% above the $66.97 share price when the offer was made public.

At the time of writing rival groups are considering their options about a long-mooted break up of Beam. They have been doing their sums ever since Fortune announced that Beam would be separated from its disparate interests in sporting equipment and household fittings, so they know which brands they would like and what they would be willing to pay.

But they face not only regulatory hurdles because of portfolio overlaps, but also investor anxieties about topping the very high price Suntory has offered, which is 20 times Beam’s latest earnings. That matches the multiple Pernod Ricard paid for Vin & Sprit in 2008, which generated considerable criticism at the time.

More recent takeovers have been at multiples of 13 to 14 of the target company’s earnings. And because of the $400m-plus penalty payment due to Suntory if Beam talks to another suitor, any rival bid will need to be hefty indeed to succeed.

There are four linked reasons for Suntory’s bid – and why it is paying a meaty premium in an attempt to block out potential rivals. First, owning Beam will enable the group to reduce a reliance on its Japanese home market which accounts for 75% of sales.

The population is ageing and demand for Suntory’s Japanese whisky brands Yamazaki, Hakushu and Kakubin is slowing. The need to diversify was underlined by Suntory’s purchases of the Orangina Schweppes soft drinks range plus the Ribena and Lucozade brands. Now Beam will give it a global spread in spirits.

Buying Beam will overnight make Suntory the world’s third largest producer of premium alcohols by volume after Diageo and Pernod Ricard and will give it immediate enhanced access to the US, the world’s largest spirits market. That will enable the privately-controlled company to make large strides towards its goal of achieving annual sales of $19bn by 2020. In 2012 its turnover was $17.6bn, compared with Diageo’s net sales of £11.4bn in 2012/13

Third, it will also acquire a dynamic portfolio on which to build global expansion. Not only is it acquiring Jim Beam, Teacher’s, Laphroaig, Sauza Tequila, Canadian Club and Courvoisier, but into that Suntory will fold a global sales and marketing organisation for its existing spirits interests such as Midori liqueur and Morrison Bowmore, the distiller of Islay’s Bowmore single malt whisky which it bought in 1994. In one swoop the Japanese parent group will become a much larger player on the world stage and notably in the market for Scotch.

Fourth, although cost-saving synergies in the deal are likely to be small, there will be few on-costs as the two groups are an excellent fit with no significant product overlaps. Beam already distributes Suntory’s premium whiskies in Asia while Suntory handles Beam’s portfolio in Japan, so there is a working relationship.

In addition, Suntory’s financial muscle will be available to Beam’s existing successful management, which will remain in place, to bolster its expansion through further brand extensions at premium prices plus niche takeovers to augment the portfolio.

Matt Shattock, Beam’s chief executive, had already flagged his ambitions to build a wider portfolio through niche acquisitions, a process he started once Beam became a stand-alone company, by buying Pinnacle vodka and Cooley, the Irish distiller. He has also presided over premium range extensions such as flavoured Bourbons. That process can now proceed apace, providing the Suntory takeover is completed.

Within days of the deal being made public, the rumour mill had thrown up the prospect of Suntory buying Whyte & Mackay from Diageo. The commercial logic was sound as Diageo is being required to sell W&M as part of the regulatory price for winning India’s United Spirits, a deal that is wending slowly though the Indian courts. Amalgamating Teacher’s and W&M would have given Suntory a powerful slice of the market for blended Scotch and a stronger footprint on the burgeoning Indian market. However, Suntory has denied interest.

But assuming the purchase of Beam completes as expected by the late spring, then there will be three truly global players – Diageo, Pernod Ricard and Suntory – all looking for competitive advantage in a series of niche takeovers of important local brands that deliver enhanced routes to market in the developing world.

Both Brown Forman and Bacardi are family controlled, which makes them difficult takeover targets apart from their size, which in present circumstances might put them out of reach to any of the new Big Three. And some analysts are speculating that the controlling families might hold exploratory talks about links ranging from joint sales forces to a full merger in order to protect their market shares and control costs as a new wave of aggressive competition is unleashed on them.

Suntory’s bid for Beam has already changed the dynamics of the global spirits sector and we can expect more realignments in this latest round of consolidation in the spirits sector.

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