Jim Beam Meeting Skinnygirl Invites $11 Billion Liquor Takeover: Real M&A
Bloomberg - Oct 24th 2011, 09:22
Jim Beam bourbon and Skinnygirl cocktails may be enough to convince Pernod-Ricard SA (RI) and Diageo Plc (DGE) to attempt the biggest spirits acquisition in six years.
Beam Inc., the liquor company formed in the breakup of Fortune Brands Inc. this year, would be worth about $59 a share in a takeover, said Goldman Sachs Group Inc. That would value the Deerfield, Illinois-based owner of Courvoisier cognac and Cruzan rum at $10.8 billion including net debt, making it the largest deal in the liquor industry since 2005, according to data compiled by Bloomberg.
With bourbon sales outpacing vodka in the U.S. as drinking at home increases, Beam’s command of a third of the domestic market with Jim Beam and Maker’s Mark may lure Pernod, Europe’s second-biggest distiller, or Diageo, the world’s largest spirits company, said Davenport & Co. and Goldman Sachs. While Pernod’s $14.2 billion in debt and Diageo’s distribution of tequila and cognac brands may be hurdles to a takeover, according to GFI Group Inc., Beam is an appealing entry into the bourbon market because it isn’t family controlled like Jack Daniel’s owner Brown-Forman Corp. (BF/A), said Liberum Capital Ltd.
“Beam’s bourbon play is attractive for the potential buyers,” Alfredo Scialabba, a special situations analyst at GFI Group in New York, said in a telephone interview. “They have a very strong position in the U.S., which is the most profitable market, so it would be a very nice addition to one of the other global players.”
Stephanie Schroeder, a spokeswoman for Paris-based Pernod, declined to comment on whether the company is interested in acquiring Beam.
Alcohol, Golf Balls
“We will continue to look at opportunities for acquisitions where we see a chance to strengthen our company,” said Stephen Doherty, a spokesman for London-based Diageo. “Targets we pursue will be those which make strong strategic sense for our business and where the valuation is sensible.”
Fortune Brands, an assemblage of alcohol, home and golf products, announced in December that it would split in three to focus on liquor after its largest investor, William Ackman, sought to dismantle the company to boost shareholder value. The Titleist golf unit was sold this year, and Beam and Fortune Brands Home & Security Inc. began trading independently after the Oct. 4 separation.
“The new Beam is off to a great start, and we’re primed to accelerate profitable long-term growth,” said Clarkson Hine, a spokesman for Beam. “With the powerful combination of our brands, strategy, innovation engine and financial flexibility, we see a bright and prosperous future as a leading player in the dynamic spirits industry.”
He said there are many rumors in the industry that never come true and declined to comment on whether Diageo or Pernod have approached Beam.
Beam generates more than 30 percent of its sales from bourbon, primarily Jim Beam and Maker’s Mark, Judy Hong, a New York-based analyst at Goldman Sachs, wrote in an Oct. 4 report. Beam’s bourbon brands account for about a third of the total volume of bourbon sold in the U.S., Hong estimated. Bourbon is a type of whiskey that can only be produced in the U.S., must be aged in new, charred white oak barrels and made of a grain mix of at least 51 percent corn.
Earlier this year, the company bought Skinnygirl cocktails, created by Bethenny Frankel of reality TV show “The Real Housewives of New York City.” The brand caters to women with 100 calories per serving.
“We think it’s a great business and it’s a great collection,” Ackman said of Beam in a phone interview last week. “We love the business.” He declined to comment on the potential for a sale. Ackman’s Pershing Square Capital Management LP was the company’s largest investor with 13.5 percent of the shares as of Aug. 9 before the split, data compiled by Bloomberg show.
Jim Beam is the third-largest whiskey brand in the U.S. behind Brown-Forman’s Jack Daniel’s and Diageo’s Crown Royal. Sales of the Jim Beam brand rose almost 8 percent in the 52 weeks ended Sept. 4, compared with a 4 percent increase for the category, according to SymphonyIRI Group, a Chicago-based market researcher. Crown Royal grew 5 percent while Jack Daniel’s declined slightly in the same period.
“It’s a very valuable bourbon franchise, in particular, and a global bourbon platform,” Ann Gurkin, a Richmond, Virginia-based analyst at Davenport, said in a phone interview. “There is big potential for growth.”
Drinking at Home
Sales of bourbon have outpaced vodka in the U.S. this year, according to Nielsen Holdings NV, a New York-based research company. Growth is being driven, in part, by new flavored bourbon drinks, such as the black cherry-flavored Jim Beam Red Stag that was introduced in 2009.
While alcohol consumption has declined at restaurants and bars, drinking at home has risen steadily in the U.S. after the longest recession since the Great Depression ended in June 2009. The Real Personal Consumption Expenditures of Alcoholic Beverages for Off Premises Index has gained 13 percent since then and reached a record in August, the last month for which figures were available, according to data compiled by Bloomberg.
Beam is also an attractive acquisition target because it’s one of the only spirits companies not controlled by a family, Pablo Zuanic, a New York-based analyst at Liberum Capital, said in a phone interview. Jack Daniel’s Tennessee Whiskey and Early Times 354 Kentucky Bourbon Whiskey are made by family-owned Brown-Forman.
‘Scarcity of Assets’
“There’s not a lot of hurdles if an acquirer wants to pursue an acquisition at Beam,” Goldman Sachs’ Hong said in a phone interview. “There’s a scarcity of assets out there. A lot of the multinational companies like Diageo or Pernod really don’t have a major presence in the global bourbon category.”
Beam is worth about $59 a share in a takeover by valuing the company’s equity and debt at about 14.3 times estimated earnings before interest, taxes, depreciation and amortization of $757 million in the next 12 months, according to Hong. That multiple is based on past deals in the spirits industry, said Hong, who estimates there’s a 30 percent to 50 percent chance of Beam being acquired.
At $10.8 billion including net debt, a takeover of Beam would be the biggest deal in the spirits industry since Pernod agreed to buy Allied Domecq Plc in 2005 for 9.32 billion pounds ($17.8 billion), data compiled by Bloomberg show.
Since it was separated earlier this month, Beam has already gained 17 percent to $49.17 as of Oct. 21, giving it a market value of about $7.6 billion. That means a takeover at $59 a share would only represent a 20 percent premium.
‘Excitement and Speculation’
Applying the average premium of 31 percent in spirits takeovers greater than $1 billion, Beam would be worth about $64.41 a share, or $9.95 billion plus about $1.7 billion in net debt, data compiled by Bloomberg show.
“There’s a lot of excitement and speculation around this stock,” said GFI Group’s Scialabba. “But, of course, it’s expensive right now.”
Beam may instead be a buyer. Chief Executive Officer Matt Shattock said last month the standalone liquor company is prepared to make large acquisitions if the right opportunity arises. He declined to identify potential targets.
“We won’t feel constrained in terms of the scale,” Shattock said in a Sept. 14 phone interview. “We have a strong and very flexible capital structure and that gives us the opportunity to contemplate various types of transactions.”
Still, Pernod, which makes Chivas Regal whiskey and Absolut vodka, may be interested in acquiring Beam, according to Goldman Sachs’s Hong and Davenport’s Gurkin. Beam would give the distiller, which currently has no U.S. bourbon brand, a 31 percent share of the American bourbon market and carry Pernod into the Canadian market, according to Liberum Capital’s Zuanic.
“If Pernod were to buy Beam, in the U.S. it would be almost as big as Diageo,” Zuanic said. “It’s more strategic to Pernod.”
Pernod is seeking to cut its borrowings to about four times adjusted Ebitda by June 2012, from 4.4 times as of June 30. Pernod, which was boosted to investment grade by Moody’s Investors Service last month, was able to raise $1.5 billion from its biggest dollar bond sale last week with the lowest coupon it’s ever paid for 10-year debt. The distiller had total debt of almost 9.8 billion euros ($14.2 billion) as of June 30, data compiled by Bloomberg show.
There will be no “transformational acquisitions from our side in this and the next fiscal year,” Pernod CEO Pierre Pringuet said last week in a phone interview.
Diageo vs. Pernod
“You can be like a child looking at the shop windows, saying ‘there are many toys I’d like to buy,’” Pringuet said. “But we have one focus today, to continue to deleverage the group.”
Diageo “continues to be the frontrunner in terms of chatter about a Beam takeout,” Vivien Azer, an analyst at Citigroup Inc. in New York, said in a phone interview. Diageo, which is facing slower sales growth in Europe and the U.S., may want to buy Beam to gain share in the American bourbon market. Acquiring Beam would boost Diageo’s share of the U.S. bourbon market to 44 percent from 13 percent, according to Liberum Capital’s Zuanic.
“It’s strategic for Diageo because it would put them in a very, very strong position in the U.S.,” Zuanic said. “It would also be a defensive move, to some extent, against Pernod.”
The seller of Johnnie Walker Scotch whisky, Smirnoff vodka and Guinness beer could also expand Beam’s bourbon sales in Europe and Asia, where Brown-Forman has done relatively well selling its Jack Daniel’s Tennessee whiskey, Zuanic said.
Jose Cuervo, Hennessy
Diageo would need to resolve conflicting distribution agreements, including with LVMH Moet Hennessy Louis Vuitton SA (MC), said GFI Group’s Scialabba. Diageo already has distribution deals with Jose Cuervo tequila and LVMH’s alcohol division for Hennessy cognac. Beam makes Courvoisier cognac and Sauza tequila.
United Spirits Ltd. (UNSP) of Bangalore, India, has said it’s interested in buying Beam’s Teacher’s Scotch whisky, the best- selling Scotch whisky in India, the Wall Street Journal reported Sept. 29, citing comments by United Spirits Managing Director Ashok Capoor. Capoor told the Journal that the companies hadn’t approached each other. The company didn’t respond to an e-mail sent to its media relations department requesting comment.
“The spirits market itself is relatively fragmented, so the consolidation is a trend that we think will continue,” said Goldman Sachs’ Hong. “Beam, with their Jim Beam brand, has the strategic appeal of being one of the few global bourbon brands.”
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