Jim Beam Maker Fortune Brands to Split in Three After Ackman Builds Stake
Fortune Brands Inc., the maker of Jim Beam bourbon and Titleist golf balls, plans to split into three separate businesses and focus on distilled spirits after activist investor William Ackman built up a stake.
Fortune will spin off its home and security division as a publicly traded company and sell or spin off its golf unit, according to a statement today. Chief Executive Officer Bruce Carbonari said Fortune found “much strategic common ground” with Ackman’s Pershing Square Capital Management LP, which became Fortune’s largest investor this year.
Ackman has sought to dismantle Fortune, founded as a tobacco company almost 150 years ago, to boost the value of its stock. Before he disclosed his stake two months ago, Fortune had slumped 28 percent since Carbonari took over in January 2008.
“This is the first step to clear the decks for a potential private market transaction for one or more of the businesses,” Doug Lane, an analyst with Jefferies & Co. in New York, said today in a telephone interview. “The real upside could be, ‘What will the spirits portfolio fetch if you get strategic buyers involved?’” Lane recommends holding the stock.
Fortune, based in Deerfield, Illinois, rose 61 cents to $61.76 at 4:01 p.m. in New York Stock Exchange composite trading. Before today, the stock had risen 18 percent since Oct. 7, the day before Ackman disclosed his stake, as investors anticipated a breakup. Fortune is fairly valued at its current share price, Lane said, adding the stock could decline to $50 in the unlikely event the company abandons its plan.
Fortune has an enterprise value of $13 billion, which includes items such as debt. Alone, the spirits business, anchored by its bourbon portfolio, could be worth $8.4 billion, Lane said. That’s based on estimated 2010 earnings before interest, taxes, depreciation and amortization of a set of peer companies he evaluated.
The home and security unit may be worth $3.5 billion, while the sports equipment business, centered on Titleist, may be worth $1.1 billion, Lane said.
Ackman, who previously pushed for change at Target Corp. and Wendy’s International Inc., disclosed an 11 percent stake in Fortune Brands Oct. 8. He may stand to make a profit of about $265 million, based on figures provided in regulatory filings and today’s closing stock price. Ackman was unavailable for comment, said Bethany Norvell, a spokeswoman for Pershing.
“Ackman is someone who’s made a living of breaking things up to realize value,” Credit Suisse Group AG analyst Anthony Bucalo said in London today. “The implication is that there’ll be a significant spirit asset up for sale,” suggesting the liquor business could get involved in a transaction.
Companies have pursued more than 400 transactions in the spirits industry over the past five years, according to data compiled by Bloomberg. The median multiple in those transactions was about 10.4 times ebitda. That period also has yielded about 80 deals in the sporting goods industry globally, with a median multiple of 9.1 times ebitda.
Fortune dates its origins to the 1864 founding of its predecessor by North Carolina farmer Washington Duke, according to Hoover’s Inc. It expanded into home products in the 1980s and added seven liquor brands from Seagram in 1991. It has owned the Jim Beam distillery since the 1960s and exited tobacco in the 1990s.
Fortune Brands hired Credit Suisse and Centerview Partners LLP for advice ahead of meetings with Ackman, four people with knowledge of the matter said in October, declining to be named because the talks were private.
Fortune’s liquor unit, whose brands also include Courvoisier cognac and Effen vodka, is the company’s most profitable business, with earnings of $485 million on sales of $2.5 billion last year, according to data compiled by Bloomberg. The company gets about 45 percent of sales from its home and security unit, including Moen faucets and Therma-Tru doors. The division contributed 17 percent of operating income in 2009.
Diageo may be interested in buying Fortune’s bourbons, including Maker’s Mark, to expand in the category in the U.S., according to UBS. Distribution agreements with LVMH Moet Hennessy Louis Vuitton SA’s alcohol division for cognac and with Casa Cuervo SA de CV for Jose Cuervo tequila may prevent Diageo from buying the unit due to competition issues.
If Diageo were to bid for Fortune’s bourbons, there would “have to be someone else to come in to pick up the rest of the brands,” Bucalo said. “It doesn’t appear there’s anyone in the spirits industry who has the capacity to do that.”
Matthew Jordan, an analyst at Matrix in London, wrote today in a note that Diageo could lead a group of buyers for the unit, including Davide Campari-Milano SpA. Campari spokeswoman Chiara Bressani declined to comment.
Pernod-Ricard SA may be interested in buying the unit to add tequila and bourbon to its portfolio, though it doesn’t have the financial capacity to do it at the moment, UBS analyst Jason Derise said. Calls to a Pernod spokesman today weren’t immediately returned.
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