BEAM Going Away

nicklipinski

Earlier this morning, Suntory and BEAM announced that BEAM would be acquired by Suntory in an all cash transaction.

  • BEAM shareholders will receive $83.50 in cash (versus a closing price of $66.97 on Friday)
  • The transaction values BEAM at nearly 20x ’13 EBITDA (one quarter remaining)

Suntory has a very modest U.S. presence (we recommend the Yamazaki whisky – very clean finish for those that disdain the more peaty Scotch whiskies), so there is likely no regulatory issue to speak of in the U.S. (also no synergies, which makes the multiple even more eye-opening).

Back in our initiation piece on consumer staples, we highlighted BEAM as a potential acquisition candidate:

  • “Two names that we think could make long-term strategic sense for a number of companies, MJN and BEAM, both trade above 16.0x EV/EBITDA (next 12 months).  Any sort of material premium to the current share price has an acquirer paying 20.0x EV/EBITDA, a multiple that is difficult to justify for any business.”
  • Our concern about the multiple led to its spot on our least preferred list, clearly not one of our better calls.
  • BF/B likely sees some strength on this news; our inclination would be to fade that strength.
  • One name that may be weak is DPS – Suntory as an acquirer is likely some small part of the longer-term investment thesis there.

Importantly, valuations across consumer staples make us hesitant to suggest that this deal is the start of a trend – we think Suntory/BEAM is the result of several factors that are not easily replicated:

  • A longer-term strategic imperative.
  • An indifference to valuation on the part of certain management teams – we go back to Japan Tobacco’s acquisition of then RJR’s international tobacco business and how JT figuratively choked on that deal for years.
  • Management teams that make capital allocation decisions using artificially low cost of capital assumptions.

For us, the possibility of a deal is always another reason to own a stock (not the primary), therefore we would be hesitant to chase anything that might benefit tangentially from this news, preferring to fall back on our broader concerns over staples valuations and associated business momentum.

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