Monday, December 19, 2011

Goldman Sachs misses a beat on Beam acquisition

Saw in my morning news round-up that Goldman Sachs' analysts don't believe Beam's acquisition of Irish whiskey maker Cooley will affect the chances that Beam itself will become an acquisition target. "Tuck-in acquisition in line with management commentary, does not alter our view of BEAM as a likely acquisition candidate - BEAM has been vocal in its willingness to acquire where appropriate and the scale of this purchase is very small. Given these factors we do not believe the acquisition alters the likelihood of BEAM ultimately being an M&A target." I think they're missing something.

Beam has been an acquisition target since before it was spun off as a pure drinks company earlier this year, a move that was tantamount to dousing it in warm cow blood and tossing it in the tiger cage at the zoo. The Jim Beam and Maker's Mark franchises alone -- and the huge wedge into the growing US bourbon market they represent -- made Beam the top item on the M&A menu for hungry drinks companies like Diageo, Pernod Ricard, and Campari. There may be problems with getting such a large chunk of the bourbon market -- US antitrust action has woken up from a long sleep, see the nixing of the proposed AT&T/T-Mobile merger -- but that would only affect Campari, with their Wild Turkey ownership.

But what about Irish? There are only three Irish whiskey distillers (and four distilleries, counting Cooley's newly re-opened Kilbeggan distillery; though there is strong speculation that William Grant will build a distillery for their new acquisition, Tullamore Dew), and Pernod and Diageo own the other two; Midleton/Jameson and Bushmills, respectively. Cooley is a tiny bit of that market, but may well have an outsize effect on anti-monopoly considerations.

Competition regulators were likely relieved when Pernod was forced to sell Bushmills in 2005 (as part of brand off-loading it had to do in order to buy up Allied Domecq); I suspect they're not going to be quick to allow even this much more concentration of Irish whiskey, especially when it's growing the way it is. Is it a deal-breaker? No. Is Beam still likely an acquisition target? Given the way things have been going the past 15 years, almost certainly. Does this complicate things? Yes, I do believe it does, especially for Diageo (which owns Bushmills and fast-charging Bulleit and the admittedly tiny George Dickel) and Pernod Ricard (ruling the Irish whiskey world with Jameson).

But does it mean anything to you? Hard to say. Did Campari buying Wild Turkey change anything? Not yet; the new distillery was a Pernod project the Italians simply completed, and they're continuing the brand extensions. Diageo buying Bushmills was probably a good thing, long-term.

But I can't help thinking about British brewing. Twenty years ago, there were about six large British brewers left. Now there are none. You can argue that they made crappy beer, but they're gone, and largely the jobs are gone. Do you really want to see American distilling go the same way? Beam is independent; Brown Forman is independent; Heaven Hill is independent; Buffalo Trace/Sazerac and Van Winkle are independent. Now Beam is in the hunt, and Brown Forman's been mentioned. Heaven Hill's probably safe as a family-owned company, but Sazerac? Hard to say.

And of course, it weakens the argument of keeping American distilling American when the company you're concerned about just bought the last independent Irish distiller. Kismet, anyone?


The Beer Nut said...

I'm told Pernod Ricard already made a play for Cooley but it was blocked on a monopolies basis. As things stand it would give Pernod Ricard 100% of the distilleries in the Irish state.

Of course, Grant and the Porterhouse could well change all that by building new plants and thereby pave the way for Pernod Ricard to take Beam, Cooley and all.

Bill said...

I'm a little confused -- it seems that you and Goldman Sachs are in agreement on Beam being an acquisition target, so what did they miss? Antitrust difficulties if the acquirer is a spirits company?

Re: no large UK breweries: by the standards you're using to determine that, are there any large US breweries now? Maybe Boston Beer and Yuengling?

Lew Bryson said...

And there you touch on another nerve: once Diageo, Pernod, and Campari own all the substantial spirits brands, do they start adding brewers and beers? Diageo, of course, has a head start, and despite speculation almost from their formation still holds Guinness. But despite what we may say, and the winevolk may say, when you get down to it, wine-beer-sprits companies are all drinks companies, with a lot more in common than car makers or shipbuilders or even restaurant groups. The question is, who will start it: Diageo eating brewers, or ABInBev eating distillers? I keep thinking of that apocryphal tale of Alexander, said to have wept because there were no more worlds to conquer. Beer and wine still beckon...

Lew Bryson said...

I think they underestimate the problems that an acquisition of Cooley by Beam will set for either Diageo or Pernod then buying Beam. With ownership of Irish whiskey already so concentrated, I don't believe Irish authorities will be happy about it being further concentrated, even by this small amount.
On your other point...well, no! Though I think Coors could re-establish as an American company pretty easily, and I'm not sure that won't happen.

The Beer Nut said...

Bear in mind that, legally, Bushmills is in a foreign country so AFAIK has no bearing on the monopolies issue.

I can't see it spreading to beer 'cos that's a totally different market that works a different way. You can't sell Irish beer for $200 a bottle in a Japanese airport...

Plus, while it may be difficult, it is actually possible to set up an independent brewery in Ireland and provide an alternative for drinkers. Setting up an independent distillery is almost impossible. Irish law gives a tax-break to artisan brewers but effectively makes artisan whiskey-making illegal.

Lew Bryson said...

Looking worldwide, not just at Ireland. They've already got your brewery, man! Small brewers are thriving, sure, and as the shift in beer continues, maybe consolidation gets weird, but the majors are still the lion's share of drinkers' choices...and beer works on volume, not margin; different business model, but there are more similarities than differences. After all, most Scotch whisky sold is common or garden blended, not hugely expensive single malts or aged blends. But you knew that... :)
And anyway; laws can change.

HolzBrew said...

Wicked M&A analysis. You sure you're not applying for a job at the WSJ?

Cheers and Happy New Year!