Time for some fantasy M&A.
How might Diageo go about constructing a bid for the alcoholic drinks business of Fortune Brands? It’s up for grabs after the US conglomerate announced plans to split in three.
One way would be to join forces with Bacardi and carve up the Beam Global Spirits & Wines portfolio, with Diageo taking Jim Beam and Maker’s Mark, and Bacardi Courvoisier, Canadian Club and Sauza.
According to Simon Hales of Evolution Securities, a joint bid would allow Diageo to overcome any competition hurdles — the UK company could not buy all of Beam Global, because of the distribution deals it has with LVMH Moet Hennessy on cognac and with Casa Cuervo for Jose Cuervo tequila — as well as expand its Bourbon business in the US:
Although a full acquisition of Fortune’s spirits business by Diageo would be difficult due to regulatory concerns, (see table below), the group’s balance sheet could comfortably support an acquisition. Moreover, Diageo is very keen to gain a firmer foothold in the Bourbon category.
Strategically, Diageo would be very keen to gain a substantial position in the Bourbon category, which it could more effectively develop in both the US and internationally than the current incumbent. Jim Beam and Maker’s Mark would deliver this. We think Diageo is the front-runner to buy BGS&W.
Diageo and Bacardi, of course, won’t have a free run at Beam Global Spirits. Note that Fortune Brands hasn’t actually put the business up for sale – although no one believes it will be independent a year from now.
Pernod Ricard, Constellation Brands and Brown Foreman are all likely to be interested in acquiring what is the world’s fourth largest spirits business. However, Hales says there are good reasons for thinking a Diageo/Bacardi bid has the greatest chance of success:
We value Fortune’s spirits business at US$8.7bn. A number of international spirits companies are likely to be interested in acquiring BGS&W; however financial and regulatory constraints may prevent any aggresively competitive auction developing. Pernod Ricard and Constellation are highly leveraged, while Brown Forman would have regulatory issues. That leaves Diageo and Bacardi as front runners in our view.
As for financing, Hales estimates Diageo’s shares of Beam Global would cost £3.5bn, which could all be funded via the debt market:
Although a deal with Fortune would limit Diageo’s ability to increase cash return to shareholders in the near-term, the deal would give the group an unassailable position in the US, fill the bourbon gap in its portfolio and provide a new category growth leg to be leveraged over its stronger international distribution platform. We believe these positives and the prospect of greater synergies than we currently estimate more than offset the risk to the shares of the year one EPS dilution.
Sounds like a risk worth taking.
Related link:
Whisky galore – FT Alphaville