Beam's Vodka Shot Sobers M&A Speculation (Update 1)
By Antoine Gara - 04/23/12 - 2:14 PM EDT
(Beam acquisition story, updated to reflect additional analyst comments and additional data)
NEW YORK (TheStreet
) -- William Ackman's
favorite market drink, whiskey maker Beam
, is buying vodka and rum brands from privately held spirits company White Rock Distillers
, a deal that nearly doubles Beam's presence in the Vodka market and diversifies its top shelf, but could sober up shareholders betting that a takeover offer is coming.
Beam's acquisition of the fast-growing Pinnacle Vodka brand and a line of flavored rums called Calico Jack's, is the whiskey maker's biggest move so far as a stand-alone purveyor of spirits. Beam was spun out of Fortune Brands
The $605 million acquisition may dim speculation that the maker of Jim Beam and Makers Mark whiskey can be acquired by a spirits giant like Diageo
, market chatter that began after the 2011 spinoff.
"With Diageo widely considered to be the most likely acquirer, this purchase presents another hurdle in terms of a take-out, in our opinion, as BEAM's larger stake in the vodka category creates another area of overlap with Diageo (the market share leader in the U.S. vodka category)," wrote Citigroup analyst Geoffrey Small in a Monday research note.
If a recent shot of premium in Beam shares wasn't justified by the likelihood of a takeover, the deal could be the beginning of headwinds for the company's stock.
"The company's shares have been driven up well above their fundamental value, in our view, by bid speculation," wrote Ian Shackleton of Nomura Securities in a Monday note. Such a deal with Diageo is likely off the table because, "Diageo would not be allowed to keep the Pinnacle brand, we believe, given its already high share of U.S. vodka."
Beam's shares have rallied strongly, posting over 25% gains since its September IPO. However, Small notes that speculation of a takeover drove at least some of those stock gains. "BEAM's shares are currently trading at a fairly rich 14 times second fiscal year price to earnings multiple
, reflecting the acquisition premium built into the stock."
In early Monday afternoon trading, Beam shares fell more than 2% to $55.66, double the broad market loss and outpacing the decline in consumer stocks. The decline cut into Beam's year-to-date gains of roughly 10%.
The spinoff came at the urging of activist investor Ackman, who is currently the single largest shareholder in both companies. The spinoff and Beam's initial public offering separated Fortune Brands home and security unit from its alcohols business, creating two separate publicly traded companies with a distinct focus.
In March, Goldman Sachs reiterated Beam as a potential target of a large acquirer in an update on a basket of stocks that its "tactical research" team considers M&A candidates across all sectors. Goldman lists Monster Beverage
as its newest takeover target in the beverage sector in the report.
Analysts polled by Bloomberg
give Beam shares an average price target of $56.11 on 21 buy ratings and five holds to go with two sell ratings.
Other prospective acquirers include Pernod
noted in an October article, as a result of BEAM's leading presence in the U.S. bourbon whiskey market , where it controls an approximate one-third market share. The company's Makers Mark and Jim Beam brands contribute roughly that amount to overall sales -- growing at a faster rate than Brown-Forman
-owned whiskey brands Crown Royal
and Jack Daniels
, according to SymphonyIRI
By picking up Vodka and flavored rum brands, Beam may dilute its value to a potential acquirer, but it will also provide strong diversification in the fast-growing flavored alcohols market, noted Small of Citigroup. Impact
data shows that Pinnacle has been the fastest growing premium vodka brand for three consecutive years, posting an over 92% rise in vodka cases sold in 2011. That number is expected to increase 30% in 2012 to 3.5 million cases sold, reflecting an over tenfold increase in sales since 2007. The deal will nearly double Beam's presence in the vodka market to 7%, adding to its Gilbey's, VOX and Wolfschmidt brands, notes Small.
"Pinnacle is an excellent strategic fit for Beam, giving us a strong and exciting growth platform in the sweet-spot of the attractive vodka category," said Matt Shattock, CEO of Beam in a statement. While the deal is valued at roughly 17 times White Rock's 2012 earnings before interest, taxes, depreciation and amortization, including synergies, Beam expects that the effective transaction multiple net of tax benefits will be "well below 10 times EBITDA."
Pinnacle vodka sells for roughly $14 a 750 ml bottle, a similar price scale to Constellation Brands
Svedka brand of vodka. The Calico Jack flavored rum line that Beam is picking up prices for slightly less at $11 per 750 ml bottle.
"Both brands fit into Beam's flavor expertise and innovation strengths and are positioned at 'affordable' price points," wrote Bank of America Merrill Lynch analyst Bryan Spillane in a Monday note. "We believe that distribution for these brands was spotty nationally, providing opportunity for volume growth in Beam's distribution system," adds Spillane, who expects that Beam will be able to return above its cost of capital on the acquisition.
Beam expects to see cost synergies exceed 20% of White Rock's future sales, netting up to 10 cents in 2013 earnings per share gains by wrenching out synergies in its supply chain, overhead and procurement, the company said in a statement. The Deerfield, Ill- based company also said it will finance the cash deal with its existing credit facilities and new debt, or a combination of both.
Recently, Molson Coors
cut a big Czech beer deal
, adding to consolidation in the alcohol and beers space.
At the Value Investing Congress in October 2011, Ackman revealed that he would be doubling down on Beam and its former parent Fortune Brands after their split into separate companies. Presently, Ackman owns over 13% stakes in Beam and Fortune Brands Home & Security, investments that target a recovery in discretionary consumer spending and home sales.
Fortune Brands Home Security operates the Moen faucets and Kitchen Craft cabinetry furnishings brands to go with its Simonton windows, Master Lock Security and Waterloo storage units.
"In order for the investment to really work we are expecting a housing market recovery," said Ackman at the Congress in October. "It's hard to find an investment where if things go poorly, nothing bad happens but if things recover we make a fortune." Pershing Square's best guess is that home starts reach 1.25 million a year within the next five years.
At the Congress, Ackman urged investors to pay attention to an investment vehicle that Pershing Square had invested in to make acquisitions and IPOs. In April, that vehicle -- called Justice Holdings -- took a large stake in privately-held Burger King
, paving the way for its initial public offering this summer, which will have Ackman flipping Whoppers
For more on consumer stock buys see Goldman Sachs's best buys for 2012
. See why spinoffs spin value
for more on Fortune Brands' strategy.
-- Written by Antoine Gara in New York
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