Diageo may seek its Fortune with Jim Beam

LONDON (Reuters) - Britain's Diageo Plc (DGE.L) is poised to be the leader in a race for Fortune Brands Inc's FO.N $8 billion plus Jim Beam spirits business if the U.S. conglomerate is pressed into breaking itself up.

The world's biggest spirits group would be attracted to Fortune's U.S. whiskies to fill a gap in its spirits portfolio and tap into the growing popularity of American whiskies such as Jim Beam and Jack Daniel's around the world.

Activist shareholder William Ackman took an 10.9 percent stake in Fortune last month and press reports last week said it is now more likely to cooperate with him on a split of the group between spirits, golf equipment and home products.

"If Fortune's spirits become available, Diageo has to be the leading candidate. Fortune has one of the two big American whiskies in Jim Beam and one of the fastest growing in Maker's Mark," said one banking source with knowledge of the situation.

Although an acquisition would bolster Diageo's small position in U.S. whiskies, it will create anti-trust problems around cognac, tequila and Scottish whisky which may limit Diageo to acquiring a few brands or require a bidding partner.

"We believe Diageo may either try to cherry pick brands in any break-up like Jim Beam and Maker's Mark, or seek to acquire the business in combination with another player and then split the assets," said analyst Simon Hales at Evolution Securities.

Fortune, which also owns Courvoisier cognac and Sauza tequila, is the No.4 spirits group in the world after Diageo, Pernod Ricard (PERP.PA) and privately-owned Bacardi and No.2 in the United States after Diageo.

Its spirits unit had sales of nearly $2.5 billion in 2009 under half the group's turnover of $6.7 billion, but made over 80 percent of group profits after its home and security business, making kitchen cabinets and security locks, was hit by the downturn. Its world leading Titleist golf business makes up less than 5 percent of group sales.

Analysts estimate Fortune's spirits business made earnings before interest, tax, depreciation and amortization (EBITDA) of around $685 million in the year to end-September and putting it on a 12 times multiple the business would be worth $8.2 billion.

This multiple puts it in line with industry breakup deals such as the 11.2 times Diageo and Pernod paid in 2001 for Seagram and the 12.4 times Pernod and Fortune itself shelved out for Allied Domecq in 2005, but below the recent deal when Pernod bought Absolut vodka group Vin & Sprit in 2008 at 20.4 times.

Analysts say although Fortune owns top brands such as Jim Beam, Courvoisier, Sauza, Cruzan rum and Laphroaig malt whisky, there are plenty of smaller so-called tail brands which a buyer would probably want to sell-off and so limit its overall price.

Some more bullish analysts suggest the price might go as high as 15 times if a competitive auction gets going, putting a value on the business at $10.3 billion.

Jim Beam is the world's No.1 Kentucky bourbon and the No.2 American whiskey after Jack Daniel's, and these two make up 55 percent of U.S. whiskey volumes and analysts said Diageo needs one of these brands to make any impact on this market.

Jim Beam sold 6 million 12-bottle cases and Tennessee whiskey Jack Daniel's 9.5 million cases in a U.S. whiskey market of 28.3 million cases in 2008. Jack Daniel's is owned by Brown-Forman Corp (BFb.N), controlled by the Brown family.

Diageo has No.1 global brands in scotch whisky, vodka, gin, and liqueurs with Johnnie Walker, Smirnoff, Gordon's and Baileys, but is a relatively small player in the U.S. whiskey market with George Dickel Tennessee whiskey and Bulleit bourbon, which is produced under contract for Diageo.

The British group may face competition from Bacardi which is diversifying way from its eponymous white rum, Dewar's whisky and Grey Goose vodka in the U.S. and would face few regulatory hurdles, but analysts believe the price could be a stretch and it may look to join forces with Diageo in a joint bid.

Paris-based Pernod is keen to expand in the U.S., but has high debts from recent acquisitions, while private equity has not shown big interest in spirits in the past, analysts said.

"We believe an acquisition of Jim Beam by Diageo would be taken positively by the market. Not only would it be earnings and value accretive, it would also demonstrate the group does have strategic options," said Evolution's Hales.

However, analysts warn Diageo will not be able to take on all of Fortune's brands. It is unlikely to be able to own Courvoisier and continue with its 34 percent stake in Moet Hennessy it owns with partner LVMH (LVMH.PA), and which owns the world's No.1 cognac Hennessy.

Courvoisier is the smallest of the big four cognac brands and with the majority of its sales in the U.S. and Britain is not as attractive as Hennessy, Remy Martin (RCOP.PA) or Pernod's Martell which all have big exposure to growing emerging markets, especially China.

Fortune's Sauza is the world's No.2 tequila, with Diageo having a marketing deal to sell the world's No.1 Jose Cuervo, and so Diageo would have to decide whether to continue distributing the top brand who's marketing rights come up for renewal in 2013 or own the second largest, analysts said.

Diageo which controls around one third of the world's scotch whisky market is unlikely to be able to take on Fortune's scotch business including Teacher's whisky and malt whisky distilleries Laphroaig and Ardmore.

(Reporting by David Jones; Editing by Jon Loades-Carter)