Just the Answer Special: Beam Global Spirits & Wine
Fortune Brands' Beam Global Spirits & Wine appeared to be perfectly placed to swoop for Vin & Sprit, but yesterday's announcement that Pernod Ricard had won the Swedish company's hand surprised most of us. In a 'Just the Answer' special, Olly Wehring talks to Beam's president and CEO, Tom Flocco, about the events of the last 48 hours.
just-drinks: Considering the outcome of the auction for Vin & Sprit, and your position in most observers' minds as the hot favourite, you must be quite disappointed.
Tom Flocco: I would say, would we have preferred a different outcome? Yes. But given the value that was paid for the business, first of all the Government made absolutely the right decision. That value seemed to be far in excess of what the line was that we were reading in the press. People were speculating that the business was worth between US$5.5bn and $7bn - to see a number north of $9bn, when all is said and done, that's a remarkable premium. As a seller, that's the sort of bidder you hope for.
We have always been a company that's very disciplined in terms of the investments that we make and what we can support in terms of good value for our shareholders. At the end of the day, that's where we shook out on this. I'm not disappointed in the outcome, given where the guys eventually ended up. It's just a huge spread over what we thought the business was worth.
j-d: How big a role did the current economic climate play in dictating the limit Beam Global was prepared to go to to buy V&S?
TF: I think the current economic climate both inside and outside the US is challenging in some cases. But that's all cyclical. When we look at a business like this, we look at what it's worth to us over a long period of time, and we know there'll be many economic cycles over the course of that timeframe. We don't look at it and ask if it's going to last six, nine or 12 months - we're not that precise.
The credit and capital markets moved against us, but they moved against a lot of us. In the end, I don't think that they moved so much that they affected value because there was a very full value offered for the business. But that's a different set of economic conditions that are quite unique - we don't expect those to be repeated or be sustained for a long period of time.
j-d: Last year, when you sold your US wine business to Constellation for US$885m, it looked like you were lining yourselves up for the V&S auction. In retrospect, was this sale the right decision?
TF: I'm still convinced that that was the right move. Given the returns of the wine business compared to the returns from the spirits business, when you look at the choices we make for investments - not just in terms of acquiring assets but also in terms of the capital we have to put in to sustain those assets - to us, there's no comparison between the wine business and the spirits business. I'd much rather be investing in our spirits business than in our wine business.
In terms of what we are doing with that cash, part of that is what's driven our stock up close to 9% today, in that we've announced a share buyback. We believe our shares are significantly undervalued, and as a company we've made a commitment to buy back up to 15m shares because we think that's a good place to put at least some of that money.
The other avenue for us is to maintain our financial flexibility, so that when other opportunities present themselves, we're ready for them. If you look at our portfolio, we have leadership positions in a lot of very important categories, especially the Bourbon and Tequila categories. We also have strong positions in Cognac and Canadian whisky, but there are other opportunities for us that will present themselves over time and we want to be ready to be able to act on those.
j-d: One observer has suggested that the V&S sale signals the beginning of a slew of mega-buck acquisition in the spirits industry. Do you think that's the case, or are there still more local opportunities to be had?
TF: I think there'll be a bit of both. I don't want to speculate on where different industry players will go. There certainly could be some fairly significant moves, but I don't think anybody necessarily feels the pressure, although with the multiples that were paid today, maybe that will spur some to think differently.
Then I think there are always the one-off, bolt-on single brand acquisitions that give you a better position in a given category that would make sense, so I think it'll be a mix.
j-d: Looking at Future Brands, your distribution joint venture in the US with V&S, it appears that Pernod has inherited Beam Global as a sitting tenant until 2012. What are your plans here? Do you intend to just sit back and count the cash until then?
TF: Our intention is to keep the V&S brands within Future Brands through the duration of the contract.
It's always good to count the money. But for us it'll be business as usual. We're not sure yet what the governance structure will look like, and how the authorities will allow us to interact. V&S was a single brand company when we created that structure. Obviously, with a portfolio company, it's going to be a little different, so we're going to have to wait and see what we're allowed to do. In the meantime, we have a very potent sales force with that portfolio of brands together, and there's no reason to disrupt that momentum.
j-d: Do you have a final message for the drinks industry, after the events of today?
TF: As a company, Beam is very well-positioned to compete and to succeed going forward. We have a portfolio that was significantly enhanced by the Allied Domecq acquisition a couple of years ago. That gives us the leadership position in a lot of important, big growth categories. That gives us what we need to compete going forward. We see only our best days ahead of us.
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