Beam a "Very Scarce Asset," Says Key Investor.

I've written before about the newly pure-play Beam Inc. as a potential acquisition target. My skepticism came from looking at it from the industry side, and sizing-up the potential buyers such as Pernod and Diageo.

But another way of looking at it is from the perspective of Beam Inc.’s largest shareholder, Pershing Square Capital Management, which is led by activist investor Bill Ackman. Shanken reported today that Pershing Square held 20.8 million shares of Beam Inc., worth about $1.13 billion, at the close of 2011. That's roughly one-eighth of Beam’s current market capitalization.

In his third quarter letter to Pershing investors last November, Ackman wrote, “Beam now has many strategic alternatives available, including a sale of the business, a merger with another spirits company, and the acquisition of other brands. We believe the spirits industry will see significant consolidation over the next several years, and Beam’s leading global positions in Bourbon and Tequila could entice several bidders or merger partners in the future.”

Ackman added that Beam is now “the world’s only pure-play, publicly traded global spirits company that is not family controlled or influenced—in other words, it is a very scarce asset.” Beam has said repeatedly that it intends to be an acquirer and not a seller, which is how I see them going as well but, obviously, Ackman has a lot more skin in the game than I do.

The company’s comparable net sales rose 8% to $2.3 billion in 2011, led by a 7% increase for Jim Beam, as well as double-digit growth for Maker’s Mark, Courvoisier and Teacher’s and an exponential jump for its Skinnygirl cocktail brand.

Though burdened for many years as part of an old-fashioned diversified conglomerate, Beam's biggest growth spurts came by acquisition. In 1987, Beam was essentially a single-brand company (Jim Beam bourbon). That year it acquired struggling National Distillers, primarily to get the DeKuyper liqueurs brand, but it picked up a broad portfolio in the process, including several more whiskeys (e.g., Old Crow, Old Grand-Dad, Old Overholt).

Then, in 2005, Beam teamed up with Pernod to divide up the assets of Allied Domecq. That brought into Beam's stable many of the brands that are now contributing to Beam's success, including Sauza Tequila, Maker's Mark Bourbon, Courvoisier Cognac, and Teacher's Scotch.

Ackman is probably right about more industry consolidation, as the business becomes fully globalized.  If, for example, the Beckmann family were to deprive Diageo of Jose Cuervo in the current contract negotiations, Beam would be able to plug two of the biggest holes in Diageo's portfolio, American whiskey and tequila. That might prove irresistible to both Diageo and Mr. Ackman.

Beam Global Announces Major Reorganization.

Reading corporate tea leaves (i.e., press releases) is never easy. So it is with Monday’s corporate reorganization announcement from Beam Global Spirits & Wine.

For one thing, you can bet that the words used to sell it in the board room are not the same words that appear in the press release. At least you hope savvy directors of a multi-billion dollar corporation are not dazzled by sentences like, “In addition to further building a high-performance organization that will enable faster decision-making and sharper focus on customers and consumers, the initiatives will also unlock resources that can be reinvested in driving brand growth.”

Although ‘unlock resources’ is corporate-speak for cost-cutting, the rest is gobble-dee goop.

But this part is interesting. The brand portfolio is being realigned into three groups. One of those groups is bourbon, just bourbon. One presumes rye is included, blends as well, though it’s not surprising they aren’t mentioned as neither amounts to very much business.

Beam’s bourbon portfolio includes Jim Beam, Maker’s Mark, Knob Creek, Booker’s, Baker’s, Basil Hayden, Old Grand-Dad, and Old Crow.

The other two brand groups are ‘mixables’ (rum, tequila, vodka and cordials) and ‘classics’ (cognac, scotch and Canadian whisky).

That this realignment involves brand management is to be expected but the three groups will also have their own finance, operations and human resources functions, with profit-and-loss responsibility. Presumably, ‘operations’ includes production, i.e., the distilleries. All this suggests that the groups will not be simply marketing divisions, but more like wholly-owned and self-contained subsidiaries.

Sales will be separate and will sell all three groups. The U.S. sales organization will be distributor-specific. It and the three brand groups will report to Bill Newlands, president of Beam Global’s U.S. business.

Internationally, Beam Global will merge its two current European regions into one, resulting in three groups based on geography: Europe, Asia/Pacific, and Emerging Markets/Travel Retail. The international units will report to Donard Gaynor, senior vice president and managing director – international.

Newlands and Gaynor will report to Matt Shattock, president and chief executive officer of Beam Global.

Beam Global has had a fascinating history to this point. It traces its origins to the Beam family and specifically to Jacob Beam, who started to make and sell whiskey in Kentucky in the late 18th century. It was a Beam family-owned business until 1920. After Prohibition, a group of Chicago investors owned it. After World War II, the son of one of those investors bought the others out. He and then his son-in-law ran the company, which made and sold Jim Beam Bourbon Whiskey and very little else. They sold it to American Tobacco Company, makers of Lucky Strike and Pall Mall cigarettes, in 1967.

Even though they no longer owned the company, members of the Beam family continued to have a major role at its two Kentucky distilleries, and in marketing its bourbons, as they do to this day.

It continued to be essentially a one-brand company; run, in very top-down fashion, by the tag team of Barry Berish and Rich Reese. Along the way, American Tobacco changed its name to American Brands, then sold its tobacco assets and changed its name again to Fortune Brands.

In 1987, Beam acquired National Distillers, a larger but poorer company. Although it was billed as a merger, Berish and Reese remained in charge.

But the National merger did change the company by making it a player in most distilled spirits categories, not just bourbon. This was crucial, considering the state of bourbon sales in 1987. Although the National deal netted three whiskey distilleries and such venerable brands as Old Grand-Dad and Old Crow, the real prize in Beam’s eyes was DeKuyper, whose Peachtree Schnapps had become a million-case brand.

Reese got the top job in 1997 when Berish retired. Reese himself retired in 2003. Reese was an interesting guy, who came to Beam as a salesman after a 12-year Major League Baseball career, at first base and in the outfield, mostly for the Minnesota Twins. He is perhaps best remembered as the batter who gave Nolan Ryan the single-season strikeout record in 1973.

In 2005, the Beam company transformed itself again. It helped Pernod Ricard buy Allied-Domecq, then the world’s #2 distilled spirits company. They split the spoils between them, giving Beam control of Maker’s Mark, as well as Canadian Club, Teacher’s Scotch, and several other major brands. The deal elevated Beam to the top rank of worldwide spirits companies. This time, unlike in 1987, senior management of the acquired company came on board in key positions.

The reorganization announced yesterday is further fallout from 2005. It is the first major move by new CEO Shattrock, who was hired in April from outside the company.

Although the faces change, Beam has always been a very smart company. They don’t make many mistakes. That’s why, from the narrow vantage point of the bourbon enthusiast, yesterday’s announcement should be regarded as good news. In effect, Beam has set-up an independent company just to look after its American whiskey assets, a company that is free to compete aggressively against its own stable mates in the scotch, Canadian, and other spirits categories. It will also have to live or die by its own success, more or less.

You can’t know for sure if this realignment will work, or even take, but considering Beam’s track record you probably should not bet against them.

Delete the "& Wine" Part

In 2005, when Jim Beam Brands Company partnered with Pernod Ricard to acquire and divide between them the assets of Allied Domecq, Beam became a major international player in spirits, but also in wine. A new corporate name followed in 2006 that reflected the change: Beam Global Spirits & Wine, Inc. Now, new facts have made the new name obsolete, as Beam has divested itself of its wine portfolio.

I blogged about this in November, when an $885 million sale of wine business to Constellation Brands was announced. I just received a press release announcing that sale closed today, but it noted an earlier sale I had missed, to E. & J. Gallo Winery. At any event, Beam is now out of the wine business and has close to a billion dollars to spend on other things.

Constellation got Clos du Bois, Geyser Peak, Wild Horse, Buena Vista Carneros and Gary Farrell. Gallo got William Hill and Canyon Road. Constellation is the parent company of Barton, a full-line spirits company with a whiskey distillery in Bardstown, Kentucky.

This exit from the wine business is a little surprising, mainly because such a big deal was made of the new corporate name barely a year ago. If at the time they had intended to get out of the wine business, they could have come up with a less specific name. This suggests that the decision was opportunistic rather than part of a long-term plan. Press releases from Beam parent company Fortune Brands invariably point out how profitable the premium spirits business is, without saying what everybody knows, which is that the wine business isn't.

As a rule, investors hate surprises, so publicly-traded companies usually try to avoid them, but investors like profits even more than they hate surprises, so this surprise sale doesn't seem to be a problem for Fortune. It does, however, suggest that if Beam is thinking about using the proceeds of these sales to make a major acquisition in the spirits business, such as Absolut Vodka, it may not publicize its intentions in advance.

Still, what are they going to do about that name and their new web site?

On a slightly different subject, corporate press releases like the one I got today from Fortune invariably end with a paragraph that describes the corporation's business. It was a big deal a few years ago when the phrase, "Major spirits brands include Jim Beam bourbon.." was changed to read, "Major spirits brands include Jim Beam and Knob Creek bourbons..." It was a way of saying that Knob Creek had arrived as a successful brand. Sadly, Knob Creek has been bumped and replaced by Maker's Mark, one of the key brands in the Allied deal.