In the Spotlight - A Fortune in three independent divisions?
Fortune, known for its Moen faucets, Titleist golf balls and Jim Beam bourbon, says it will take a few months to execute its plan
Fortune Brand's decision to split into three independent businesses is the first step to unlocking the full value of the firm's portfolio, however it seems investors may need patience if they are to understand the true value of the separation, analysts wrote this week.
Fortune announced plans on Wednesday (8 December) to pursue a tax-free spin-off of its home and security business, and a sale or spin-off of its golf unit to become a "pure play" liquor company, focusing solely on its Beam Global Wine & Spirits business.
The Financial Times suggested this week that the combination of alcohol, golf clubs and faucets never made sense, dissuading specialist rivals from making takeover bids. So, could the carving up of the company solve the problem?
Wall Street seems to think so as shares traded in a range spanning from a low of US$61.00 to a high of $62.44 on Wednesday. Shares gained 1%, which took the trading range above the three-day high of $62.25 on volume of 2.5m shares.
However, it may take a number of quarters for Fortune to achieve its goals for the three divisions, and the ultimate payout remains unclear, leaving some analysts wondering if now is the best time to get out.
Fortune, known for its Moen faucets, Titleist golf balls and Jim Beam Bourbon, says it will take several months to execute its plan. But the blueprint looks clear. The firm will spin off its home and security business into a publicly-traded company, and sell or spin off its golf business. It will keep Beam Global, in what it has termed "the next logical step in the evolution of Fortune Brands".
Jefferies analyst Douglas Lane told Dow Jones that this event will only be the "first step in attaining the full underlying value of the [Fortune] portfolio".
He said that the split is a "starting point," and he expects outside suitors to buy the independent companies after they've traded on the market for a while.
Based on Jefferies estimates, the golf business is worth around $5 to $6 a share, while home and security is worth $16 to $17 a share. The remaining spirits business is estimated to be worth $39 to $40 a share.
But the spirits business is the biggest swing factor, according to Lane.
"We believe if spirits commands more of a mid-teens EBITDA multiple in a private transaction, then standalone Fortune post-spin-offs could be worth closer to $50 per share, which would imply an all-in stock price today pre-spin for Fortune in the low $70s per share," Lane told Dow Jones.
Beam could be worth between $9bn and $10bn, UBS analysts told the Financial Times, "assuming a sales multiple of enterprise value/historic EBITDA of 13-15 times".
While it is unknown when we can expect the spin-off to take place - Fortune spokesman Clarkson Hine doesn't expect a completion before the second half of next year - analysts remain mixed on how beneficial the move will be for shareholders.
JP Morgan's Michael Rehault told Dow Jones that, even using the high end of its valuation forecasts, the firm calculates a price target of, at most, $61.60. Morgan Stanley analyst Dara Mohsenian puts fair value in the mid-$60s, including a premium on the home products business.
Indeed, Moody's Investors Service put Fortune's ratings on review yesterday with "uncertain" direction and Standard & Poor's (S&P) placed the company on CreditWatch "negative."
"Fortune Brands' credit profile could weaken following the anticipated divestitures and currently unknown capital structure for the remaining spirits business, which is currently weak for the rating," analysts led by S&P's Jean Stout told Bloomberg. They forecast that EBITDA will fall by about 50% for the year to the end of eptember.
Nonetheless, according to Dow Jones, others see "a more handsome pay-off for those patient shareholders", forecasting the potential stock value of the split-apart Fortune in the low-$70s range.
Ultimately, the firm's varied businesses, analysts believe, all stand a chance of being "strong independent operations", given that underlying trends in consumer markets are showing signs of life.
However, until Fortune releases more specifics on the proposed transactions, shareholders may remain cautious.
Vivien Azer of Citigroup told Dow Jones that, while downside risks have likely been eliminated now that the company is charting its course, there are still a lot of unknowns.
"The lack of transparency here still keeps us on the sidelines," Azer said.
Symington Family Estates has followed its purchase of the Cockburn's Port brand last year by selling back most of its stake in Madeira Wine Company (MWC) to the Blandy Group....
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