Ackman move prompts Beam break-up talk

Can one shareholder change the face of a global industry? Possibly – if you subscribe to the speculation surrounding the purchase of a 10.9% stake in Fortune Brands, owner of Beam Global, by activist American investor William Ackman.

He reckons the US group’s three divisions – golf equipment (Titleist), domestic hardware and security and the Beam Global spirits arm – would perform better as separate businesses and wants the group broken up.

The prospect of Beam Global becoming an unencumbered entity is firing the imagination of investment bankers looking for a juicy commission and speculators looking to profit by backing the right suitor.

Ackman is a minority shareholder who needs to gain backing for his scheme to unlock value in an underperforming group. It might take many months, even years, for other shareholders and the board to agree to his plan. But assuming that Beam Global and its brands became available, who would want to buy it and who would be allowed to?

Beam Global had sales of $2.5 billion out of Fortune’s $6.7bn turnover in 2009, but it made 80% of the profits. It is the plum division, owning brands such as Jim Beam bourbon (six million cases a year), Makers Mark American whiskey, Courvosier Cognac, Sauza Tequila, Cruzan rum and Laphroig single malt.

Analysts reckon Beam Global made operating profits of about $685m in the year to the end of September and so have put a paper value of $8bn or more on it. A multiple of about 20 times earnings – the level at which Pernod Ricard bought Vin & Sprit – would value it at almost $13bn.

Only one rival group could afford even the lower price tag on its own if it wished to – Diageo. The world’s leading spirit company would no doubt see Jim Beam as filling the bourbon hole in its portfolio. But that would commit Diageo even further to the mature North American spirits market when much of the future growth is in Asia and South America.

Additionally, it is no secret that Paul Walsh, Diageo’s chief executive, wants the 66% the company does not already own of Moët Hennessy, not least because, alongside Scotch, Cognac is the growth engine in emerging markets. He cannot afford Beam Global as well.

Not that he would be allowed to keep it all. Courvoisier is a direct competitor of market leader Hennessy Cognac and Sauza is the number two Tequila to Diageo’s José Cuervo.

It is true that the distribution rights to Cuervo expire in 2013, but Diageo has invested heavily in the brand and would be eager to enter a new contract or even buy it. Competition authorities would doubtless bar Diageo from controlling both Tequilas as well as Cruzan, which competes with Captain Morgan. So to get Jim Beam, if it wanted it, Diageo would have to find partners in a break-up of Beam Global.

What about Pernod Ricard, the junior partner in the 2001 dismemberment of Seagram? The French group lost out to Fortune in the tussle for Sauza five years ago and admits that a global Tequila brand is a major hole in its portfolio. But Pernod Ricard already has big brands in Beam Global’s other categories and anyhow is intent on paying down the debt it incurred to buy Absolut vodka just two years ago.

At the AGM last week, Pierre Pringuet, Pernod’s chief executive, intimated to shareholders that no significant takeovers would be considered for at least the next 18 months, even if the group could raise the finance when banks are reluctant to lend.

Brown Forman could not afford the price tag for Beam Global, nor would Washington and Brussels allow Jim Beam to fall into the same hands as Jack Daniel’s (9.5m cases), and while Bacardi would face few regulatory hurdles, the privately controlled company would also find $8bn-plus a lot to raise. Constellation might like some of the lesser Beam brands to bolster its spirits portfolio, but it is in a period of retrenchment.

David Campari has about €400m to spend on acquisitions, making it a potential junior partner in a split of Beam Global, but not a major player.

While a variety of combinations of suitors is possible, all have difficulties, which might leave the way open for a private equity house to orchestrate a division of the spoils. But they are at the bottom of bankers’ Christmas card lists at present. Irish banks are more popular.

So for a while at least, Mr Ackman may have to be content with goading Fortune Brands into extracting better overall performance from its ailing arms or obtaining a separate stock market listing for Beam Global. Those speculating about immediate industry transformation through a redistribution of brands are jumping several guns.

Finance on Friday, 19.11.2010