Fortune Brands Inc. and Pernod Ricard announced that Fortune Brands will purchase several of the premium spirits and wine brands included in Pernod Ricard's proposed acquisition of Allied Domecq. The brands Fortune Brands is acquiring are expected to enhance the company's high-margin spirits and wine business and expand its presence in key international markets. As a result of the transaction, Fortune Brands will more than double its spirits and wine sales and will be among the top four spirits companies in the world.
The brands Fortune Brands is purchasing include:
— Sauza tequila;
— Maker's Mark bourbon;
— Courvoisier cognacs;
— Canadian Club Canadian whisky;
— Laphroaig single-malt Scotch;
— Clos du Bois and other super-premium Napa and Sonoma wine brands; and
— market-leading national brands in the U.K., Germany and Spain markets.
Fortune Brands will pay an agreed price of approximately 2.8 billion pounds ($5.3 billion) in cash for the brands, related production facilities and key distribution assets. The company expects the acquisition will be highly accretive to earnings and currently estimates it will add $0.25 to $0.35 per share in the first full calendar year.
"We see the purchase of these exceptional, complementary brands as an excellent high-return growth opportunity that will fill gaps in our portfolio and take our very profitable spirits and wine business to the next level," said Fortune Brands chairman and CEO Norm Wesley. "These brands and distribution assets will significantly enhance our spirits and wine business by elevating our entire portfolio, supporting growth of our existing brands, expanding our scale in key markets and creating valuable distribution efficiencies."
The brands being acquired had combined sales for the year ended August 31, 2004, of approximately $1.3 billion and brand contribution of approximately $545 million. Fortune Brands' spirits and wine business generated sales of $1.2 billion for the year ended December 31, 2004. Fortune Brands' total 2004 sales were $7.3 billion.
"Sauza, which is gaining share as the world's fastest-growing global tequila brand, will make us a leader in the attractive tequila category and become our second largest spirits brand," Wesley continued. "Courvoisier will give us a premier, growing position in cognac. Maker's Mark has contributed to the growth of the bourbon category and will be an excellent complement to our existing portfolio. Canadian Club and Laphroaig are strong brands that will enhance our position in key categories. The addition of the acclaimed wine brands, including Clos du Bois, to our Geyser Peak and Wild Horse wineries will quadruple our wine volume and place us among the top five super-premium U.S. wine companies." The acquisition includes the Allied Domecq sales and distribution operations for wine in the U.S.
The national brands Fortune Brands is acquiring include:
— Larios gin brand in Spain, currently owned by Pernod Ricard;
— DYC whisky brand in Spain;
— Fundador brandy;
— Teacher's Scotch whisky;
— Harvey's sherries;
— Cockburn's port brand; and
— Kuemmerling bitters brand.
The transaction will nearly double the company's spirits and wine volume, while increasing from three to nine the number of the top 100 premium distilled spirits brands in the world held by Fortune Brands.
"We've built an excellent track record of taking high-impact actions that have steadily enhanced our Jim Beam Brands spirits and wine business, and this is another significant step forward," Wesley added. "The innovative distribution joint ventures Jim Beam Brands has established with partners including The Absolut Spirits Company, Remy-Cointreau and Edrington Group's Highland Distillers have elevated our distribution while reducing costs. Beam's successful brand investments have helped grow our flagship Jim Beam bourbon and our super-premium spirits. With industry-leading flavor innovations, Beam has created breakthrough products like Starbucks Coffee Liqueur and DeKuyper Sour Apple Pucker. And we've built a deep and talented team at Jim Beam Brands that will take this business to the next level."
"We expect this transaction will further benefit our international distribution and create valuable opportunities for our distribution joint ventures — Future Brands in the U.S. and Maxxium internationally," said Tom Flocco, president of Jim Beam Brands. "We've had excellent success growing Jim Beam globally, and strengthening our presence in attractive markets where our brands are under-represented is the next logical step. We've long seen the U.K., Germany and Spain as priority markets, and the addition of the high-impact global growth brands and the strong national brands will help us achieve additional scale that will help drive stronger international growth for core premium brands such as Jim Beam." The transaction includes the Allied Domecq sales and distribution operations in the U.K., Germany and Spain.
"The opportunity to overlay these new brands and distribution assets on our existing structure offers compelling benefits to all our distribution partners," Flocco continued. The addition of the new brands offers the opportunity to increase case volume for Maxxium by approximately 70% and for Future Brands by 20%. "Adding additional volume and strong brands will both reduce distribution costs and improve our local distributor focus," said Flocco. "We also look forward to benefiting from the talent of the brand management, distribution and production teams that have helped build these brands into global leaders. Combined with our existing organization, we feel well positioned to manage and grow this expanded brand portfolio."
"Spirits and wine is a growing, high-return industry that generates excellent cash flow," Wesley said. "We believe the targeted expansion of our spirits and wine business will accelerate our profit growth in spirits and wine and even better position Fortune Brands to deliver on our long-term goal of double-digit growth in earnings per share. This move will also result in a more balanced portfolio for Fortune Brands."
"With returns well in excess of our cost of capital, we believe this highly accretive move creates significant value for shareholders. The purchase price of approximately $5.3 billion — or 9.7 times trailing fiscal year (August) 2004 brand contribution — represents an attractive valuation for such high-caliber brands."
While not a bidder for Allied Domecq, Fortune Brands is purchasing the brands upon completion of Pernod Ricard's proposed acquisition of Allied Domecq.
French wine and spirits group Pernod Ricard offered 10.7 billion euros ($14 billion) for British rival Allied Domecq. Pernod Ricard, the maker of Glenlivet whisky and Havana Club rum, said the agreed takeover would create the "second-largest spirits and wines company worldwide."
Pernod Ricard's cash-and share offer was for all stock in Allied Domecq. The friendly takeover, in association with Fortune Brands, puts a premium of 36.2% on the price of Allied Domecq shares on February 3, the day before speculation about a bid began to build.
Allied Domecq's board unanimously recommended the offer to shareholders.
If approved by regulators, the merger, mixing a vast cocktail of top-shelf brands, would reposition the global industry.
Pernod Ricard president Patrick Ricard said he was "very satisfied with this transaction which turns us into the real number two in the world in wines and spirits."
Allied Domecq chief executive Philip Bowman said the offer "provides Allied Domecq shareholders with the ability to crystallize value and an opportunity to continue to participate in the future success of many of our brands within the enlarged business."
Cost synergies were slated to reach 300 million euros ($390 million) per year from the third year of operation, well ahead of analysts' expectations.
Pernod Ricard said the deal would give the combined Pernod-Allied a 26% market in North America, a key region for the drinks industry, compared with Pernod's stand-alone market share of just 12%.
"This deal above all brings a unique strategical argument, and the price paid reflects the potential in terms of sales, synergies and cash flow of over 800 million euros ($1 billion)," said analysts at Fideuram Wargny in Paris.
Britain's Diageo, the industry leader formed in a 1998 merger, has a 10.5% share of global sales volume, while Pernod Ricard holds 5.7% and Allied Domecq 5.1%.
Pernod Ricard intends to retain most of Allied Domecq's activities, and notably several top brands such as Ballantine's whisky, Beefeater gin, Kahlua, Malibu rum, Stolichnaya vodka and Tia Maria as well as up-market wines such as Montana, Mumm and Campo Viejo.
The deal will also bring the French group some prominent local brands such as Imperial in South Korea, Wiser's in Canada and Presidente in Mexico.
European Union regulators are expected to approve the takeover now that Pernod Ricard has found a purchaser for brands in problem markets, Brussels-based legal experts said. The Pernod Ricard acquisition of Allied Domecq is subject to Allied Domecq and Pernod Ricard shareholder approvals, the approval of English courts, necessary regulatory approvals and other customary conditions. The transaction between Fortune Brands and Pernod Ricard will be subject to routine regulatory approvals and is expected to close in the third quarter. While there will be a transitional period not to exceed six months during which the assets will be transferred to Fortune Brands, the company will fund the acquisition at the time the transaction is completed and will manage the brands and assets — and receive the profits and cash flows — from the date of closing.
Fortune Brands will have certain rights with respect to the Pernod Ricard offer for Allied Domecq and will be entitled to receive its share of any break fee payable by Allied Domecq. The cash provided by Fortune Brands will be used to pay Allied Domecq shareholders. The amount Fortune Brands will pay represents approximately 38% of Pernod Ricard's offer consideration for Allied Domecq and approximately 46% of the cash.
This may not be the end of the shifts in the beverage category, however. Pernod Ricard SA chief executive Patrick Ricard said he expects to see further sector consolidation following the French drinks group's purchase of Allied Domecq.
Asked by French daily Le Monde whether consolidation is likely to continue, he said, “Yes I think so.
“Behind us, there are a lot of smaller companies called on to become bigger. More things could happen.”
He declined to comment on how much the group expects to gain from the sale of Allied's Dunkin' Donuts chain and ice cream franchise Baskin Robbins.
“The goal is to sell them as quickly as possible, but I am not going to tell you for how much or when,” he said, adding that Pernod Ricard needs time to work out the true value of these assets.
“At this stage, we do not have enough information,” he said.
Even the Allied Domecq deal may be in question. U.S. drinks giant Constellation Brands Inc. and Bacardi are said to be plotting separate counter-offers for Allied Domecq PLC, newspapers have reported.
Constellation, owner of Stowells wine and Diamond White cider, is believed to be planning to mount a bid jointly with Diageo PLC and Brown-Forman, maker of Southern Comfort and Jack Daniels.
Though no agreement has been struck with the two firms, Constellation has called in investment banks NM Rothschild in London and Merrill Lynch in the U.S. to advise it on a deal, the Mail claimed, citing insiders.
Japanese drinks group Suntory and French luxury goods firm LVMH are also thought to be looking for a way into the deal, it added.
Rum maker Bacardi, meanwhile, spent the weekend pondering a bid for Allied, according to an unsourced article on the Business.
Bacardi chairman Ruben Rodriguez previously held talks with Allied chief executive Philip Bowman about a merger. Some of the 100 family shareholders who control Bacardi want to see if anything can be cone to resurrect a deal and outbid Pernod, it said.
The Observer said, without citing sources, that Bacardi could be persuaded by Constellation to join its team, especially if the rum maker can take over Allied's London stock market listing.
Bermuda-based Bacardi is a private company but is considering becoming a PLC.