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Buyout firms circle Fortune Brands' home unit: sources
January 5, 2011 / 9:33 PM / 7 years ago

Buyout firms circle Fortune Brands' home unit: sources

NEW YORK/PHILADELPHIA (Reuters) - Several major private equity firms are considering buying Fortune Brands’ FO.N home products unit after the company announced plans to spin off the $3 billion division, five people familiar with the matter said.

Some of the large buyout firms, including Blackstone Group (BX.N) and Bain Capital, are studying the potential of either making offers for the entire unit or acquiring a stake in the business as part of the planned spin-off, the people said.

Such considerations are at a preliminary stage and it is unclear if Fortune would be interested in selling to buyout firms, which would incur heavy taxes, as opposed to a tax-free spinoff, the people said.

Varying views on the pace of recovery in the economy and the battered U.S. housing sector in particular could also make the valuation exercise difficult for private equity firms, the people said. They were not authorized to speak with the media and asked not to be named.

Bain and Blackstone declined to comment. Fortune spokesman Clarkson Hine said the company believes a tax-free spin-off to shareholders would generate greater potential long-term value than all other alternatives and it intends to pursue that path.

The unit -- called Fortune Brands Home & Security LLC -- has annual revenues of about $3 billion. Its major brands include Moen faucets; Aristokraft, Omega, Diamond and Kitchen Craft cabinetry; Therma-Tru door systems; Simonton windows; Master Lock padlocks; and Waterloo storage products.

The division’s earnings before interest, tax, depreciation and amortization (EBITDA) totaled roughly $350 million in 2010 but could recover to well above $400 million this year, according to one of the sources close to the company.

Based on average industry trading multiples of 7-8 times its depressed 2010 earnings, the unit would be worth roughly $2.5 billion to $2.8 billion.

However, to convince Fortune Brands’ board to consider selling the home products unit, any bids would have to take into account a likely recovery in earnings this year and next, as well as a premium multiple of around 9 times EBITDA, people familiar with the matter said.

“The board would tell you ‘Don’t look at 2010.’ That’s why the math gets tough because the sponsors have to put a much bigger price on it and that affects their returns on the equation,” one of the sources said.

“The company is pretty well positioned to capture the recovery in the economy and the board of directors at Fortune would want full value for the asset.”

Interest in Fortune Brands’ building products business is so far driven by the largest private equity firms, with strategic bidders -- meaning the companies competing in the same industry as Fortune Brands -- unlikely to come out in force, the sources said.

Several sources also said that the multi-billion-dollar price tag, taxes and the uncertain outlook for the housing market recovery indicate that the home unit would most likely end up in a spinoff.

“Part of the reason they are doing it as a spin is that the tax leakage is pretty sizable,” one of the sources said. “I also think that it’s probably not the best time in the world to run a process to sell a building products business.”

“Although there is some interest from sponsors to do an LBO (leveraged buyout) in building products, that’s a pretty heavy one to do,” that source said.

Deerfield, Illinois-based Fortune is the largest U.S.-based spirits company, competing against Diageo (DGE.L), Pernod Ricard SA (PERP.PA) and privately held Bacardi.

Its profit declined in the last three years and its sales in the last two, as the crash of the U.S. housing market curtailed demand for its windows, doors, cabinets and faucets and the recession capped consumers’ discretionary spending on golf products and alcohol.

Credit Suisse CSGN.VX and Centerview Partners advised Fortune Brands on the break-up, sources have told Reuters previously.

Reporting by Soyoung Kim and Megan Davies in New York and Jessica Hall in Philadelphia; editing by Carol Bishopric and Tim Dobbyn

Our Standards:The Thomson Reuters Trust Principles.
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