Analysts believe the management of JBB's Scotch business acquired a bargain in their MBO last month, but why should they succeed where the multi-national failed? David Broom investigates the factors that will determine success or failure.

You could almost sense the relief when Fortune Brands' CEO Norm Wesley declared the £200m sale of the company's troublesome Scotch division to a management-led team as "a positive strategic development", allowing the firm to "intensify its strategic focus on the premium and super-premium spirits and wine market."

Fortune (aka Jim Beam Brands) had been trying to offload its Scotch interests for some time, but why were Brian Megson and his team, a German bank and a property firm so keen to buy a business which its previous parent regarded as a non-essential division and which, again to quote Wesley, "offered low returns and lower growth".

With the benefit of hindsight it can be seen that Jim Beam moved into Scotch at the wrong time, paid too much money for its stake and, it is widely thought, once in, didn't listen to experienced whisky men.

A lot of money was laid out over the years. In 1990, American Brands paid £160m for Whyte & Mackay and, after a protracted battle, shelled out £382m in 1993 for Invergordon, a figure regarded as over-generous at the time.

Though the company wrote off £278m in goodwill relating to those purchases in 1998, over the years, £582m has been spent putting together a Scotch division which has now been offloaded for £208m. The general feeling in the Scotch industry is that the new company - for some reason called Kyndal - has got a bargain.


"Jim Beam must be pretty battered and bruised to be willing to sell it at such a knock-down price."

"On paper the deal looks good," said one insider. "Jim Beam must be pretty battered and bruised to be willing to sell it at such a knock-down price."

Clearly a business dominated by own- and private-label was out of synch in today's globalised business. The buy-out is illustrative of how the drinks industry is running on two very different tracks. One is for the big players who are only interested in global brands, the other for smaller firms who operate as niche players around the fringes with a tighter 'regional' focus.

Everyone talked of how good it was to see the operation back in Scottish hands and being "run by people who understand whisky". Though this sounds like Celtic jingoism, it is rooted in a battle that continues to rage in the industry between 'incomers' who don¹t see the logic of having huge amounts of capital tied up for years in warehouses and old hands who view Scotch as a long-term business.

Megson and his team are seen as members of the latter camp, but first need to undo the Beam corporate culture and rebuild bridges with the trade.

What has Kyndal bought? A claimed 9% share of the whisky market, concentrated in the UK and France which can be broken down into the branded side: based around the value brand Claymore and mid-priced Whyte & Mackay; and own-label from Invergordon. There's five distilleries: one of which [Tamnavulin] is on the verge of being sold, another [Tullibardine] that's mothballed and, importantly, the Invergordon grain plant.

Initial statements infer that Kyndal will not be building Whyte & Mackay into a global brand, but concentrating on the Invergordon side of the business, which already generates more than 50% of the company's revenues.

The £200m question is whether the new owner can run a primarily non-branded whisky business at a profit at a time when the world is becoming increasingly branded. The own-label/value-for-money category may generate volume, but profitability is low. It is a notoriously cut-throat sector, with suppliers jostling to undercut each other in order to get lucrative deals with supermarkets.

That said, Megson's timing is shrewd. The industry has virtually balanced supply and demand after years of glut and sales are rising. "If it continues in this way, they could be sitting on a gold-mine," said one source. "The global own-label and vfm (value for money) categories are pretty buoyant. The trick now is to ease prices up - a £2 per case rise could transform Kyndal's profitability."

That's a big "if". While there is no disputing the logic of trying to push prices up, Kyndal is playing in a category where increasingly powerful retailers are, if anything, driving prices down by playing suppliers off against each other. And some of Invergordon's rivals are willing to sell at rock-bottom prices to get their stock on shelf.

"Prices could move," said another insider. "Though what is needed is for the cheapest on display (COD) to shift upwards. At the moment in the UK it's being sold in at £7.50 and retailing for £7.99. If we could get COD moving then money could be made."

One way for Kyndal to ensure this would be to start a process of consolidation within the own-label sector. A major player would have greater leverage over prices and with Kyndal in acquisitive mood it makes strategic sense.

While own-label will remain a significant part of the business, Kyndal also needs its brands to start working. During the Jim Beam era the high quality of the premium Whyte & Mackay blends was overlooked and the growth of the malt category underexploited. There is potential for both. The Dalmore has the class to become a leading malt brand, but has received little to no support. It's telling that Jim Beam has retained US rights for the malt and would be ironic if, having sold the firm, it now started promoting Dalmore seriously.

It's not beyond the realms of possibility that Kyndal could snap up some other brands - perhaps some of the jetsam from the Seagram purchase, while the global thinking that dominates UDV's thinking could see a sell-off some of its smaller 'regional' brands.

But there remains a question over distribution. Whyte & Mackay/Invergordon was always a strange fit in the Maxxium portfolio and with the main partners in that firm expressly talking of global branded strategies the fit seems even more awkward. If Kyndal has no synergy with Jim Beam's strategic focus then how can there be one with Maxxium¹s? Expect the ties to be quietly loosened.

After that, it's up to Kyndal to set about building new alliances and rebuilding its sales team. On balance the buy-out is good news for the industry, but it won¹t be plain sailing.