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October 27, 2011

Who Would Benefit Most From Beam Inc Sell-Off, Part Two - Local Companies

WhiskeyTots_sxNow that Beam Inc is a standalone company it can be considered very vulnerable to being broken up by various players. The company has some high-quality international brands which would appeal to many international players both large and small. However, around half of Beam Inc's 260 million litre global volumes are accounted for by local brands in North America and Spain with little or no potential for international expansion.

These local brands offer a strong route to market for Beam Inc but are unlikely to appeal greatly to international players due to their primarily economy or standard positioning. This, in turn, offers small and medium-sized local players in those markets a fantastic opportunity to expand. Many of these brands would not become available until the leading international players have cherry picked key brands, that is to say after the major acquisition has taken place.

Great opportunities to grow scale in Spain for local players

A large proportion of Beam Inc's volumes outside the US are accounted for by local Spanish brands, notably Larios Gin, DYC other whisky and Centenario brandy, making the company the third biggest spirits player in Spain in 2011 with a 11% volume share. All these brands have limited or no growth potential outside Spain and so the key purpose of acquisition would be to gain scale in the country. Although the Spanish spirits category is expected to register a CAGR decline of 1.6% over 2011-2016, according to Euromonitor International's latest research, the 240 million litre category still offers opportunities for growth.

There are a number of Spanish companies that would be keen to enhance their share of the Spanish market. Chief amongst these are Varma and Diego Zamora. The former lost the distribution of Cutty Sark and other brands in Spain in 2010 and as a consequence lost half its volumes. Hence, the company may be looking to invest to return to its former position. Diego Zamora, after the split with Maxxium and the loss of the distribution rights to Brugal rum, has been acquiring new brands in order to stabilise its position. In 2011, the company acquired Ron Matusalem and in 2010 Pernod Ricard's Pacharán Zoco.

Other Spanish companies such as Grupo Osborne and González Byass are likely to be less interested in the brands as they look to mitigate declines in Spain through growth internationally, although the opportunity to increase their shares in the Spanish market by the three percentage points offered by brands such as Larios and DYC may be too tempting an opportunity to miss.

There could also be outside interest from French player La Martiniquaise. The company has been looking to develop its presence in Spain through its blended Scotch brand Label 5 and has increased its production capacity as a result. Gaining one of the larger brands would greatly increase its current 1% share of the market and give it a good platform from which to develop its Scotch portfolio in the country. The Centenario brandy brand would have the added bonus of commanding a small share of the Mexican market, another key growth market for the company.

Opportunities to grow in North America for local companies

In addition to having a number of local brands in Spain, Beam Inc has a larger number of smaller brands in North America which help make it the second biggest spirits producer in the region with a 9% share of volumes in 2011. This represents a great opportunity for small and medium-sized US players, such as Sazerac, McCormick and Heaven Hill, to expand their positions.

The company is present in four categories - bourbon/other US whisky with brands such as Kessler and Old Crow, Canadian whisky (Windsor Supreme, Alberta Premium), vodka (Kamchatka, Wolfschmidt, Alberta and Banff Ice) and rum (Cruzan Rum). While they have sizeable volumes these brands all lack (with the possible exception of Cruzan) the potential for international growth and so are unlikely to appeal to international companies.

If Pernod Ricard does not pick up Cruzan Rum to fill the missing gap in its rum portfolio, competition for this brand could be the most intense. The US's fifth biggest rum is not only attractive due to its size but also because of its range of flavoured variants, which are increasingly of interest to US companies as this is what seems to appeal to US consumers.

The brand might even attract the larger international companies Brown-Forman and Campari, both of which lack a rum brand in their portfolio and could look to expand the brand outside the US with their distribution network. Neither have shown a particular interest in the category recently, which would offer an opportunity for some of the larger local players such as Sazerac, Heaven Hill and McCormick to move into a category in which they lack a presence and which is expected to register a 2% CAGR (28 million litres) over 2011-2016.

Canadian portfolio offers opportunity to broaden spread

Another possibly hotly contested range would be Beam's Canadian-focused brands Alberta Premium and Alberta and Banff Ice vodkas. These brands, which account for 4% of the Canadian spirits market, offer a great opportunity for US-focused companies such as Sazerac, Heaven Hill and McCormick to move into the 153 million litre category and become the country's fourth biggest player. Sazerac already has a limited presence thanks to its acquisitions of Constellation Brands' value range of spirits and more recently a number of Pernod Ricard's smaller brands and a distillery, but the others do not, so this would allow them to expand.

Of the remaining Beam Inc brands, it is the bourbon/other US whisky brands Kessler and Old Crow which are likely to be the most appealing. Old Crow, despite its economy positioning, will attract interest from companies such as Sazerac and McCormick thanks to its consistent growth between 2006 and 2011 in a mature category. The other major bourbon brand, Kessler, which although bigger and commanding a higher price point than Old Crow, will be less attractive due to its recent weak performance. Its one saving grace is its strong presence in the Mid Western states, thus offering companies which are weak in the region a stronger foothold. This might even appeal to Brown-Forman as it looks to strengthen its position outside its southern heartland.

Despite their size, brands such as Kamchatka and Windsor might well be less appealing despite seeing good growth in their respective categories. Many of the potential acquirers of Beam's US brands already have a strong presence in vodka and seem more concerned about developing flavoured variants of their existing brands, while Canadian whisky is expected to decline. However, the fact that both brands command a 0.5% share of the US spirits market is bound to attract some suitors looking for scale, if not US companies then possibly Mexican companies such as Tequila Centinela and Tequila Supremo if they want to expand north of the border.

Such acquisitions do have the potential to be transformational for these companies, pushing them into the ranks of the leading players in their respective markets. These winners will be far harder to pick as much will depend on the ambition and resources of these private companies.

 


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