Thursday, January 16, 2014

Beam Me Up: Jim Beam to be sold to Suntory

Today's  Wall Street Journal reports interesting details of the proposed Jim Beam acquisition by Suntory:  a $13.6 billion dollar deal, ($16 billion, including debt), the deal is all cash and represents a 25% premia over Jim Beam's recent closing stock price.  Will this deal be successful for Suntory?  It is too soon to tell, but there are many elements of this deal that make it interesting for students of mergers.

A deal creates value when the present value of future cash flows exceeds the costs.  Three big elements of cash flows and costs are:

Bid Premia- 25% is the cost, plus all of the integration fees.  While this is in the range of typical bid premia, a much more detailed analysis is needed to determine if it is excessive. At about 20 times EBITDA, it seems pricey.  Moreover, if the market price had already anticipated the bid, the real premia could be higher.

Synergies -   should be present in the increased market power of Suntory (jumping from 15th to 3rd in market share), and from Suntory's ability to expand distribution of Jim Beam internationally.

Projected cash flows - could benefit from an increased worldwide demand for Bourbon.  A separate journal article notes that as we grow older our appreciation of more complex tastes increases.  This bodes well for the sale of bourbon and the synergies mentioned above.

It is also of interest to note the importance of ownership structure in acquisitions

The Role of Activists- Bill Ackerman's Pershing Square Hedge fund was reportedly instrumental in getting Fortune Brands to spin off Jim Beam.  Ackerman should now earn a sizeable return as the fund reportedly owns about 12% of the stock.  According to a report in The Guardian, the successful sale of Jim Beam will result in a return of 106% since the time of the spinoff.

 Ownership structure - Jim Bean isn't family controlled and is publicly listed. Both facts facilitate acquisition.  This is in contrast to Brown-Forman and others with concentrated family ownership. Concentrated ownership works to block acquisitions when the block (say, a family) is against a sale, or to facilitate acquisition when the block is in favor of the sale (presumably Pershing Square).

However, an element of caution is in order when one considers

Suntory's buying spree- Suntory has made several acquisitions in the past year.  A more careful analysis of the motives of Suntory is needed before drawing conclusions.  The spree could represent a carefully planned expansion or an attempt to increase size without adequate consideration of integration and value.  The companies acquired, however, do play to Suntory's strength in soft drinks, energy drinks, and alcoholic beverages.

So what is the market saying about the prospects of the deal being completed?

Speculation spread- after a deal is announced, the market price jumps to something closer to the bid price.  How close?  This depends on the probability the deal will be completed and the probability of deal revision.  We call the percentage difference between the market price after the deal (P1) and the bid price (BP) the speculation spread.  In this case the market price rose Monday to $83.42 just slightly below the bid price of $83.50.  The resulting speculation spread is 0.1% which is much less than the typical spread of 2%.  The Jim Beam spread is signalling a successfully completed deal.  It also suggests that the deal is less likely to be revised by Suntory or other bidders.  (See our post on Speculation Spreads.)

Two reasons for this are:

Antitrust issues- according to the journal the four biggest spirits companies only control 9% of the global market.  This is in contrast to the beer industry where the four largest companies control 49% of the market.  Antitrust issues should not be a major factor here.  
Termination fees- the termination fee of $425 million represents 3% of the deal.  While not unusual, it could still  represent an obstacle for other bidders.

Will this deal, create value for Suntory?  As we mentioned, it is too early to tell.  The positive signs are certainly the potential synergies from distribution, the improved market power of Suntory, and the demographic trends suggesting increased demand for bourbon in the future.  Whether this is enough to offset a 25% premia is still to be seen.  As for now, however, I'd drink to this one.

All the best,


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