Glenboden M & A Originations

Could Brown-Forman merge with a pure-play Jim Beam ?

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Origination Status proprietory origination, August 2009 and December 2010
Asset Beam Global Spirits Inc. (USA), no.5 global premium spirits player
Buyer Brown-Forman Corporation (USA), no.4 global premium spirits player
Seller Fortune Brands Inc (USA), leading US marketer of spirits, hardware and golfing brands
Buyer Rationale global spirits consolidation, critical mass in international expansion from USA
Seller Rationale attractive valuation
NBs Fortune Brands' largest single shareholder is Pershing, a hedge fund with cca. 10% stake
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At last, Fortune Brands is to de-merge and become a pure-play spirits group. Analysts have tipped Diageo and Pernod Ricard as buyers for the to-be liberated Beam Global. We ask whether a merger with Brown-Forman could or should be the outcome instead.

Beam Global to be freed up for sale ...Fortune Brands announced it's to spin off or divest its home & security business ('Moen' and 'Master Locks'), and its golfing division (Acushnet and 'Titleist'), to focus on Beam Global as an independent, publicly -traded spirits specialist.

Arguably, that move will only free -up Beam Global to be acquired, allowing global spirits to consolidate to the same level as global tobacco and global beer.

All the more so when Fortune Brands' largest single shareholder, Pershing Square Capital with a 10% stake, is an activist hedge fund.

... to map consolidation elsewhere ...In tobacco, after the Gallaher and Altadis deals in 2007 -8, the global business was reduced to four big players.

Likewise in beer, after the Scottish & Newcastle and Anheuser-Busch deals in the same period, the sector was down to four giants.

But in spirits, after the Absolut deal in 2008, there are still six serious global players. One deal's missing during this cycle; Beam Global is the obvious target.

... obvious buyers have other priorities ...Analysts say that Diageo or Pernod Ricard are the most likely buyers.

Diageo, booking FY2010 EBITDA of around € 3,5 bln and a net debt ratio of about x2,2, could feasibly buy Beam Global out of its back pocket (see valuation). But it has other M&A priorities with Moet Hennessy (seen related origination).

Pernod Ricard is still too highly indebted, after the massive Absolut deal in 2008, and needs another year or two of de-leveraging from its net debt ratio of nearly x5 EBITDA in mid -2010.

... US merger scenario ...Another option is for the two US champions, Brown-Forman and Beam Global, nos. 4 and 5 globally, to merge.

That would create an entity with about US$ 6 bln in revenues, that overtakes Bacardi into the global no.3 spot, generating over 50% of its sales internationally.

It would bring together Jim Beam bourbon and Jack Daniels whiskey; Sauza and Casa Herradura in tequila; Courvoisier in cognac and Finlandia in vodka.

... Brown-Forman to lead with distribution rationaleIn that scenario, Brown-Forman would probably take the lead. Not only is it bigger than Beam Global in sales terms; it's also still controlled by the founding Brown family, while Beam Global is a 'free float' -owned group.

The merger could help Brown-Forman regain growth in vodka and other categories. The group is moving from a third-party to a fully-owned distribution model, e.g. in Brazil and Germany; Beam Global's Maxxium JV will help that.

Given the relatively small scale of Brown-Forman, compared with a likely (Absolut as comparative transaction) valuation of Beam Global, such a deal would need to be part cash and part shares (see chart and valuation).

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THIS LEAD'S VALUATION
Size (€ mln) 7.500
Sector spirits
Asset Quality no.5 global branded
Seller large plc
Buyer large plc
P/S 4,0
P/Ebitda 20,0
Type enterprise value estimate
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