Who Would Benefit Most From Beam Inc Sell-Off, Part One – International Companies

Now Beam Inc has divested its other units and become a standalone spirits company, its chances of remaining independent are slim. It is publicly listed and, like Allied Domecq before it, its weaknesses in both brand and geographical terms will make it difficult for the company to retain its independence.

Any acquisition is likely to take a similar form to the previous Allied Domecq acquisition, with one of the major players and its partner/partners acquiring Beam before discarding the brands they no longer need or have to divest to meet anti-trust regulations.

Much of the focus has been on what the leading international players Diageo and Pernod Ricard would do. They would undoubtedly have a role to play as they are the companies which could afford Beam’s major brands, such as Jim Beam. With these players facing competition issues and financial restraints, it would be the small and medium-sized companies, both local and international, which would proportionally benefit the most.

In the first of two articles, Euromonitor International takes a look at which international players could benefit, while the second looks at how local players in the US and Spain could profit.

Pernod Ricard the most likely of the big players to benefit

Of the leading players, it is likely that Pernod Ricard would be the most prominent as it needs to strengthen its position in mature markets, particularly North America. It also has major gaps in both bourbon/other US whiskey and tequila. Hence, it would be likely to pick up two of the key brands, Jim Beam and Sauza Tequila, as well as possibly other brands which would give it distribution weight in the US, such as Canadian Club and the US rights to De Kuyper. However, due to Pernod Ricard’s high debt level and competition issues, its participation would be limited.

Diageo’s roll would also be limited, primarily due to competition issues (for example its relationships with Grupo Cuervo and LVMH preclude moves for Sauza and Courvoisier) but also its overly strong focus on mature markets. Its main focus, as it has clearly stated, needs to be on developing its emerging market presence where Beam Inc is relatively weak. There has been talk of Diageo going for the Jim Beam brand, but such an acquisition would not help its emerging market profile, would probably face competition issues in Australia and the cost would reduce its funds for expansion in emerging markets. Its involvement would be likely to only focus on filling the gap in its US portfolio by acquiring the super-premium Maker’s Mark bourbon.

Bacardi, despite its relatively large size and capacity to acquire some of Beam Inc’s larger brands, would be likely to join the ranks of mid-sized companies and look to acquire selected brands. In part, this is due to the company, like Diageo, being overly focused on mature markets and thus needing to diversify into emerging markets, something it has realised, as indicated by its increasing focus on them, particularly India. A bigger factor, however, is that the company’s style (and experience) is to acquire single brands rather than companies.

Opportunities for smaller international companies

It is for brands such as Teacher’s, Laphroaig and Courvoisier that competition would be strongest among mid-sized international companies such as Bacardi, Brown-Forman, Campari, William Grant and even Edrington.

Courvoisier cognac would likely be the most sought after brand as this would represent a rare opportunity to gain a stake in this premium but consolidated category, with the top four brands accounting for 82% of global volumes in 2010. Courvoisier is the fourth biggest cognac brand in the world with a 12% share of global volumes, and while its volumes are focused on mature markets, the brand is being developed in high growth markets such as China and Russia.

The most natural strategic fit would be with William Grant, Edrington and to a lesser extent Bacardi. A cognac would perfectly complement the two British-based companies’ single malt range and their focus on Asia, particularly China, and Russia. It would also boost their presence in the core mature markets of the US and UK. Bacardi would see similar benefits with its Dewar’s brand, although not as great, and its key emerging market focus seems to be more on India. For Brown-Forman, there is less of a strategic fit in terms of its portfolio and its emerging market focus on Brazil and Russia.

Of the four companies which would be interested, Edrington is the weakest due to being the smallest in revenue terms. Both Bacardi and Brown-Forman would have the greater resources for the deal, so should be favourites if they want it. Do not rule out William Grant, which has shown ambition to expand in recent years and has money available. It also has the advantage of favourable exchange rates, giving it more purchasing power than US dollar-focused companies like the other two.

Opportunities in whiskies

The other hotly contested brand would likely be Teacher’s blended Scotch, along with the single malt brand Laphroaig, offering a rare opportunity to move into the consolidated and fast growing Scotch category.

Teacher’s, despite its relatively small size and standard/economy positioning, should attract considerable interest due to its strong position in both the Indian and Brazilian blended Scotch categories, in which it ranked first and second, respectively, in 2010 thanks to its affordable price. This would make the brand highly attractive to companies looking to enhance their position in these two markets, notably Campari and Bacardi. Rémy Cointreau could be an outside bet, although it is more likely to only want the Laphroaig brand.

Laphroaig will also be attractive, despite its small size, due to its premium nature, strong position in the fast growing US market and the category’s potential for expansion in emerging markets. As with Teacher’s, the brand should appeal to Campari and Bacardi, but also potentially Rémy Cointreau, which is looking for brands to augment its spirits portfolio and has money to spend following its restructuring and champagne division divestment. Furthermore, such a brand would complement its Rémy Martin label. With only around €500 million to spend according to its CEO, Campari’s resources may not be able to match those of Bacardi, even with its advantage in terms of exchange rate, but Rémy Cointreau’s would, for Laphroaig at least.

Beam’s range of small batch bourbons would also be attractive, although with the likelihood of one of the bigger players acquiring Maker’s Mark that would only leave the relatively small Knob Creek. This would be attractive to companies looking to enhance their premium presence in the US, such as Campari, William Grant, Edrington and possibly Rémy Cointreau.

While none of the potential acquisitions would be transformational in volume terms for the companies concerned, the brands would allow them to strengthen their positions in key markets. In financial terms, the US-based company Brown-Forman and Bermuda-based company Bacardi Limited are larger than their European rivals, while the Europeans have the greater purchasing power due to a weak dollar. Thus, it would be no surprise to see ambitious European-based companies such as Campari and William Grant do well.