Analysts were struck by the premium valuation of Beam Inc. ($83.50/share) when news of the agreement with Suntory broke yesterday, but Phil Carroll from Shore Capital wrote in a note this morning that “with limited growth opportunities in its domestic Japanese market, it would appear that Suntory is willing to pay a significant premium to acquire growth overseas”.
“Suntory will now have a strong presence in the high-growth bourbon category through brands such as Jim Beam and Makers’ Mark,” he wrote, noting that the deal to buy the world’s fifth largest global drinks company will make Suntory the world No.3 in premium spirits.
“In tequila it will have Suaza. In scotch it will gain Teachers and Laphroaig and finally in vodka through Pinnacle, to name a few,” Carroll added, all of whom would benefit from Suntory’s stronger Asian distribution.
“The valuation suggests to us that Suntory takes a much longer-term view than the other Western premium international spirit companies such as Pernod and Diageo…Pernod’s deal for Vin & Sprit was just at the cusp of the financial crisis when higher balance sheet leverage was generally encouraged.”
Diageo and Pernod prefer immature brands?
In the current climate, Carroll said he thought the multiple paid for this deal, x20 EBITDA, would be “significantly ahead” of what Diageo, and Pernod in particular, would be comfortable with.
“We believe they would see more value in developing immature brands than paying such a premium to acquire ones in the later stages of development. To us, this was highlighted when Diageo walked away from an ownership-related deal for Jose Cuervo last year,” he added.
For Suntory, the deal was mainly about brands, category exposure and distribution, with limited cost savings to be realized, Carroll said.
“Suntory will now have a real presence in the US, from what we believe was almost an immaterial presence.
“We do not see it being a significantly greater competitor than Beam already was for the likes of Diageo as the additional portfolio offering from Suntory of Japanese brands will take time to gain traction,” he added.
Noting that Yamazaki single-malt whisky was probably Suntory’s strongest current brand, Carroll said: “Even if they do, they are unlikely to be significant in the broader context.”
Asian promise for US flavored whiskies
Expressing surprise at Suntory’s swoop for Beam – given “fevered speculation” that Pernod or Diageo could swoop since the latter split from Fortune Brands in 2011 – Mintel global food and drink analyst, Jonny Forsyth, highlighted a wider trend towards eastern companies buying up western brands in a company blog post today.
Noting Suntory’s future exposure to whiskey, Forsyth said Beam’s Red Stag bourbon (flavored with black cherry) was launched in 2009 to “huge scepticism” both within and outside the company.
“However, its impressive sales and ability to attract females and younger drinkers to a category previously deemed more suitable for ‘old men’ has propelled global innovation and flavored whisky sales,” he adds.
Unlike Scotch, US whiskies had been able to inject “personality, charm and accessibility” in a highly traditional category, Forsyth said, adding that Suntory would be keen to push Beam’s brands further in Europe but also Asia and Latin America.
“Status conscious drinkers in these regions revere Scotch above all, but are increasingly interested in whiskies made from outside Scotland,” Mintel’s analyst said.