Suntory buys Beam, Pays 20x EBITDA
One of the big deals coming across the wire today is Suntory's, a Japanese booze company whose portfolio includes Yamazaki (18-year is great) and Midori, proposed acquisition of Beam, the parent company of American staples Jim Beam and Maker's Mark, continuing the trend of consolidation in the alcohol industry.
What was most interesting to me, however, was the purchase multiple of the transaction, which Dealbook states is 20x LTM EBITDA. I'll admit I haven't done a ton of digging on this, but would be interested as to what WSO thought could be driving such a high multiple in an industry as mature as alcohol. The offer price is just a standard 25% premium to where the company was trading previously, so even pre-deal Beam was trading at ~16x EBITDA. What's the growth story here? How does a company that manufactures booze (albeit at ~30% margins) demand such a valuation?
http://dealbook.nytimes.com/2014/01/13/suntory-of-japan-to-buy-maker-of…
I don't know the spirits industry, but, based off of superficial knowledge, I'm guessing economies of scale. I feel like most of their costs would be fixed in the brewery business so would their strategy be reducing redundant infrastructure? Also feel like customer captivity would be a major driver of price in the spirits business, as long as you're not looking at plastic container shit like Burnett's.
Would love if anyone with more experience could comment.
Should probably also be looking at a normalized EBIT multiple rather than EBITDA. Feel like maintenance capex would be pretty material.
Haven't looked at any of the financials, but from a strategy standpoint....Suntory is buying into the US market - hence the premium.
@"hamm0" - Definitely thought about that, as well as the opportunity to bring American brands to Asia, where they could sell at a significant premium. But it doesn't explain the fact that Beam was trading at 16x prior to the deal being announced. I think the cross-selling market opportunities are definitely a factor, but I think there's something else here as well
@"kidflash" - Interesting thought, but I don't know how much Suntory would be planning to shut down as far as fixed infrastructure, and I would think there would be a decent amount of variable costs in producing Bourbon... And although economies of scale would definitely speak to the premium, they don't really address the growth story that would justify a pre-announcement multiple of 16x
Latest earnings release, which is probably what Dealbook used, gives a normalized EBITDA figure of $782mm, so deal is ~20x that. Normalized EBIT is $655 => 24x EV / EBIT
EV/EBITDA is a function of growth and cost of capital (wacc). a low cost of capital increases the EBITDA multiple because you are willing to pay more for a surefire series of cashflows. since the alcohol industry probably has a low beta (good in a recession), it would make sense that wacc is low and thus the multiple is high.
speculation, however
I am sure there are several cost synergies between the two that they will save, but even assuming that, the multiple is still fairly high. As LouisianaStreet says, the more stable a cash flow stream the higher the multiple since the risk is less.
No question Suntory overpaid. I'm sure the synergies on Revenue and costs were far overvalued. But, as you mention, the downside is still limited because you know these brands are going to throw off a ton of cash.
The growth perception is overvalued IMO.
I'm not too familiar with the industry, however that multiple does seem a little ridiculous. However, interesting fact, just saw that this takeover will only be the fourth highest multiple paid for in the spirits industry in the past decade.
Also heard that premarket trading had it above 83.5 and speculated on a higher bid.
Disclosure: I've been an investor in Brown Forman (maker of Jack Daniel's, Southern Comfort, Woodford Reserve, and others) for several years
I've been tracking the spirits industry on and off for the past few years and what you quickly find through a cursory look at the market is that there is the one giant: Diageo (Johnnie Walker, Crown Royal, Smirnoff, Tanqueray). Pernod Ricard (Chivas Regal, Jameson, Absolut) is the other big player. This is because, like the beer industry, there's been a ton of consolidation in recent years as 1) an acquisition of a well-known brand is an easy way to enter a market and 2) international demand for spirits has increased. Brown liquors, especially, have had a resurgence in recent years (could be the "Mad Men" effect) and are becoming extremely popular in high growth areas such as China.
So with the above in mind, it's easy to see why for the past few years companies such as BF and Beam have been trading at high multiples. They've got international growth prospects and are attractive takeover targets by much larger players who have an appetite for acquisitions (BF is actually family owned though, so a much harder target).
DealBook has more detail on the spirits industry in light of the Suntory/Beam transaction: http://dealbook.nytimes.com/2014/01/13/after-beam-deal-few-big-liquor-d…
Solid color, thanks. Would sb if I could.
All alcohol isn't interchangeable. Beam makes Maker's Mark and Knob Creek, two Bourbon whisky's that are quickly growing. The alcohol market isn't growing, but certain brands within it are. Also, I'm not sure why this is, but I've heard that real bourbon can only be made in Kentucky (as Maker's Mark and Knob Creek are).
Some quick googling (so take with a grain of salt) reveals that bourbon accounted for 35% of all American spirit sales and grew 5% in 2012 so definitely a growth story here combined with a fiercely loyal customer base.
Does anybody remember the shitstorm that ensued when Maker's Mark announced they'd be reducing the alcohol content from 45% to 42% to meet international demand? That was quickly reversed.
WSJ had some good explanation on the (over)valuation. http://online.wsj.com/news/articles/SB10001424052702303819704579318942961426928
Anyone have any info on the buyout information like total debt that Suntory will take on? I am very curious to know the terms of the senior debt on this are.
Tran Value (M) 15,874.36 15,874.36 equity value (M) 13,820.46 13,820.46 Deal Price -- 83.5000 Premium 25.08% 0.26% Net Debt (M) 2,053.90 2,053.90
Wow, so they are barely using leverage on this. It would have atleast made sense to take on more debt to increase the returns. I also imagine many banks would be interested in financing this deal and Suntory could have gotten great terms.
Could another potential reason be due to the expectation of the Japanese Yen tanking in the foreseeable future so Japanese companies are buying into foreign markets to hedge their revenues against the downturn?
I wasn't surprised with Centerview picking up the Beam sell advisory as they had worked with them on the sale of their FootJoy/Home&Security arms but does anyone know who is advising Suntory? Pretty interesting deal overall I believe this is currently the largest deal of 2014?
I believe CS & Centerview are advising Beam and Mitsubishi UFJ is advising Suntory.
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