The raid on the US drinks cabinet by Japan’s Suntory Holdings is the biggest shake-up in the $117bn spirits industry for more than five years. But the $16bn cash takeover of Illinois-based Beam Inc by the Japanese group represents more a rearranging of the bottles than a depletion of the cabinet’s contents.
“The return of M&A illustrates the generic attraction of spirits company franchises,” said Philip Morrisey, analyst at Berenberg. “This deal is arguably not consolidation though, because no competitor has been removed.”
Suntory, headed by Nobutada Saji, president and grandson of the group’s founder, already boasts a sizeable number of whisky bottles in its own drinks cabinet and is Japan’s biggest soft drinks producer by sales. But the privately held group has little international presence in spirits.
So its agreed takeover of Beam – the maker of Jim Beam and Maker’s Mark whiskey and Courvoisier cognac – does little to change the global industry rankings. Rather, it signals Japan’s growing international acquisitiveness and its bet on the strength of the US spirits market – one of the world’s most profitable.
Beam, which was spun out of Fortune Brands in 2011, ranks fifth in the international spirits industry by sales – after the UK’s Diageo, France’s Pernod Ricard, and domestic rivals Bacardi and Brown-Forman.
Most analysts believe that Suntory’s punchy price effectively rules out another bidder trying to break up the agreed deal.
William Chappell, analyst at SunTrust Robinson Humphrey, said: “This was the only company really up for grabs, as Brown-Forman, the maker of Jack Daniels, is family owned. There are multiple players that are really after Beam’s portfolio, but we doubt that other bidders will step forward in light of the premium, which is 25 per cent above Friday’s close, and the $275m break-up fee.”
Diageo, maker of Johnnie Walker scotch, examined a takeover of Beam with Suntory more than a year ago, but under new chief executive Ivan Menezes it appears more focused on bedding down recent acquisitions and making forays into emerging markets.
Beam and Suntory already have distribution relationships. Japanese whisky too is growing in popularity in the US.
Pernod Ricard, which acquired Absolut vodka through its 2008 acquisition of Sweden’s Vin & Sprit on multiples similar to that paid by Suntory for Beam, has only recently reduced its debt mountain. Though it would dearly like to scale up in the US, it has effectively ruled itself out of a counterbid.
Japan’s drinks groups have been among the country’s most active overseas acquirers in recent years as they seek to offset a shrinking domestic market.
Beer sales in particular – a mainstay for Suntory as well as rivals Kirin and Asahi – have shrunk by more than a third in the past decade, a result of an ageing Japanese population and changing drinking habits.
Suntory paid $3.8bn for Orangina Schweppes in 2009 and bought the Lucozade and Ribena brands from GlaxoSmithKline last year. Most of the acquisitions have been in the Asia-Pacific region, however, including Suntory’s purchase of New Zealand’s Frucor in 2008.
Japanese groups have developed a reputation for paying high premiums, and not all of the deals have gone smoothly. Last year Asahi sued two buyout firms for allegedly misleading it about the earnings of Independent Liquor, the New Zealand-based drinks group it bought in 2011 for NZ$1.5bn.
In 2010, Kirin was forced to write down Y38.8bn on the value of National Foods, the dairy products group it created through the merger of Australia’s National Foods, which it acquired in 2007, and Dairy Farmers, which it acquired in 2008.
One M&A banker, who did not wish to be named, called the multiple paid by Suntory – 20 times Beam’s earnings before interest, tax, depreciation and amortisation – “mind-boggling” given the lack of synergies.
But Mr Morrisey at Berenberg said the premium could be justified for “getting a seat at the table of the global spirits industry, which could lead to further deal flows”.
Strong demand for bourbon, rye and other styles of whiskey in the US show no signs of abating, particularly in the premium categories.
There are multiple players that are really after Beam’s portfolio, but we doubt that other bidders will step forward in light of the premium, and the $275m break-up fee
Growing appetite for whiskey has created supply pressures on some distilleries, particularly those that specialise in artisanal, locally sourced, niche products.
In 2012, nearly 17m 9-litre cases of bourbon were sold in the US, generating over $2.2bn in revenue for distillers. This was up almost 30 per cent from 2007, according to the US Distilled Spirits council.
The deal will be a windfall for hedge fund Pershing Square’s Bill Ackman, who has been a long-time Beam investor and advocated that Fortune Brands streamline its businesses through spin-offs and asset sales.
Beam has jumped almost 25 per cent since becoming independent in October 2011, giving it a market value of close to $11bn as of Friday. Mr Ackman’s company owns close to 13 per cent of the company as of January 12, according to Bloomberg data.
Additional reporting by Alan Rappeport