Fortune on the rocks

11 October 2010 By Rob Cox

After a round of golf with his Titleist clubs, a guy pops into the clubhouse for a Maker s Mark neat before rinsing off under a Moen showerhead. That s about the closest Fortune Brands comes to synergies. No wonder the U.S. conglomerate makes such a tempting target for an activist investor.

Shareholders won t be alone rooting for Bill Ackman, who revealed an 11 percent stake last week, to break Fortune up. Diageo may one day toast the Pershing Square Capital boss. The biggest booze business in the world has long had the shakes to own a major bourbon brand. Fortune has two: Maker s Mark and Jim Beam.

Hypothetical examples aside, Fortune s three main divisions spirits, golf stuff and home products don t hang together naturally. And there are potentially better, more motivated owners for them. But drinks account for some two-thirds of Fortune s profit, so deserves the primary focus.

The group which also sells Hornitos tequila, Courvoisier cognac and Canadian Club whisky is expected to generate EBITDA of $635 million this year, according to Longbow Research. At 15 times less than the 20 times Pernod Ricard paid for Sweden s Absolut vodka Diageo s price tag could come to about $9.5 billion.

Subtract that from Fortune s enterprise value of $12 billion (an $8.4 billion market cap plus $3.6 billion of debt) and the remaining two divisions would be trading at around four times EBITDA, as estimated by Longbow. Citigroup notes that sporting-goods maker Adidas and home products manufacturers like Masco and Stanley Black & Decker fetch valuations of between eight and nine times EBITDA.

Of course, Diageo would have to scramble to pay a top-shelf price for a portfolio that includes some less attractive brands, a few in categories it already dominates. But a handful of smaller, independent firms like Gruppo Campari have shown an interest in what insiders call tail brands. That would allow Diageo to finance part of a deal with divestitures.

It s too soon to say whether Ackman wants to carve up Fortune, or if other shareholders would back him. But with a thirsty buyer waiting, and a corporate strategy best exemplified by a tipsy golfer in need of a shower, the odds are good.

 

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