Glenboden M & A Originations

Spirits consolidation trajectory - Fortune should acquire Brown-Forman

Priority Rating priority rating 4
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Origination Status proprietory origination, August 2009
Asset Brown-Forman Corporation (USA), no.1 domestic spirits player and no.4 internationally
Buyer Fortune Brands Inc (USA), no.2 domestic spirits player and no.5 internationally
Seller shareholders of Brown-Forman
Buyer Rationale global spirits consolidation, critical mass in bourbon, leading vodka brand Finlandia
Seller Rationale decline in sales and operating profit, attractive valuation, timing
NBs Fortune's other businesses, golf and home & hardware, are undeperforming and recession -sensitive
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In tobacco, after the Gallaher and Altadis deals, the global business was consolidated down to four big players. Likewise in beer, after the Scottish & Newcastle and Anheuser-Busch deals, the sector was down to four giants. In spirits however, after just one deal, Absolut, there are still five serious global players. One deal's obviously missing during this cycle. Given the contrasting fortunes of Jim Beam and Brown-Forman, we predict a merger of the two US champions, to bring harmony back to the world.

Brown-Forman is an attractive business ...Brown-Forman is generally a financially -sound and well -performing spirits group (see profile). However, in the high -margin spirits world, like in beer and tobacco, one sign of vulnerability can lead to a takeover bid.

... but has lost its tone somewhatThat's happened to B-F in FY 2009. Sales were flat, and operating profit was down by nearly 5%. What's more, the corresponding numbers for Q4 2009 declined by 12% and 10% respectively.

Fortune is a much bigger group ...Fortune Brands also has its problems, and its spirits business (Jim Beam) is smaller than B-F in revenue terms (US$ 2,5 bln next to US$ 3,2 bln). However, Fortune as a group has turnover of over US$ 7,5 bln, and continues to have a healthy balance sheet and strong free cashflow generation.

... with a transformational opportunity here ...There's an opportunity for Furtune to transform itself into a pure-play spirits major, by acquiring Brown-Forman.

... as spirits is its strongest and most stable businessin 2008, Jim Beam accounted for 33% of Fortune's sales, but 57% of its operating income. In the same year Fortune's other businesses, home & hardware and golf, were hit by the cyclical nature of the big-ticket and discretionary spending that they respectively represent.

This situation seems to have amplified in H1 2009. Fortune's overall sales fell by nearly 20%, whereas operating profit grew by the same percentage, thanks to cost cuts but also the continued resilience of Jim Beam; spirits now constituting over 70% of the group's operating income.

The portfolio fit is compellingIn portfolio terms, Jim Beam has a broadly based brand offering, but could benefit from greater critical mass in certain segments, especially internationally.

By combining its Jim Beam bourbon with B-F's Jack Daniels whiskey, Fortune would have an unbeatable global presence in American dark liquor.

The story's even better in fast -growing vodka. Having lost the distribution rights to Absolut, acquired by Pernod Ricard in 2007, Jim Beam has a big gap to fill in this category; Effen, which it bought earlier in 2009, is tiny in comparison.

Finlandia, B-F's third -biggest brand in volume terms, is a strong global vodka brand, has high recognition rates amongst consumers, and grew by 7% in volume terms in 2009. That brand would fill Jim Beam's biggest portfolio gap.

The acquisition would be expensive ...The acquisition of B-F by Fortune would be a very large transaction and, given that the former is fundamentally a strong premium business, it's likely to require valuation multiples that are as high as those that applied to the Absolut deal.

... possibly requiring Fortune to divest its other units ...It would make sense therefore for Fortune to divest its underperforming and cyclical golf (Titleist) and home & hardware (Moen) divisions, to help fund the deal over time. Both brands are strong, with leading market shares in the US.

... but the combined spirits group would become global no.3However, the game is worth the candle. A combination of Jim Beam and Brown-Forman would create an American spirits champion, with annual net sales revenue of over US$ 5,5 bln, more than 50% of which would be international. That would allow it to overtake Bacardi, with its US$ 4,4 bln turnover, for the no.3 global spirits spot.

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THIS LEAD'S VALUATION
Size (€ mln) 10.000
Sector spirits
Asset Quality no.4 global branded
Seller large plc
Buyer large plc
P/S 4,5
P/Ebitda 20,0
Type enterprise value estimate
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