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.

Old Overholt. Rye Whiskey's Grand Old Man.

You’ve probably heard about the rye whiskey revival. It’s real, just still very small.

There are several new brands out there, and some old brands have been revived, but there is one — seldom mentioned by many of rye’s new fans and misunderstood by many others — that is the granddaddy of them all:

Old Overholt.

In about 1810, Abraham Overholt (1784-1870) and his brother shifted their family enterprise from general farming, in which making whiskey was a sideline, to making whiskey as a primary occupation. Their farm was about 40 miles southeast of Pittsburgh, Pennsylvania.

The business thrived and Abraham brought his sons and then his grandsons into it. The A. Overholt Distilling Company continued to be owned and run by his descendants until it was closed by Prohibition.

Better known than Abraham Overholt or his whiskey is his grandson, Henry Clay Frick (1849-1919), one of the great turn-of-the-century American industrialists sometimes known as ‘robber barons.’ Overholt gave Frick his first job.

With his share of the family’s whiskey fortune, Frick began to invest in coal mines. Then he manufactured coke, which is essential for steel production.

Frick’s extraordinary wealth came primarily from steel and railroads, but he got a little of it from whiskey. Under his ownership, Old Overholt became the best selling brand of rye whiskey in the country.

When Prohibition began, the Overholt company obtained a medicinal whiskey license, which made it attractive to Seton Porter when he began to accumulate medicinal permits, whiskey, distilleries, and brands in about 1927 for what became the National Distillers Products Corporation.

After Prohibition, Old Overholt took its place in the National portfolio as their primary rye. Since National was one of the ‘big four’ companies that dominated the post-Prohibition industry, that automatically made it once again the top selling rye whiskey in the country.

But rye whiskey never recovered the share of market it had enjoyed before 1920. The ratio of bourbon-to-rye sales kept shifting in bourbon’s favor until rye was almost extinct. National Distillers eventually closed all of its Pennsylvania distilleries and shifted Old Overholt production to Kentucky, to the Forks of Elkhorn distillery outside of Frankfort where it also made Old Grand-Dad bourbon.

Jim Beam inherited Old Overholt when it merged with National Distillers in 1987. Beam immediately stopped distilling at Forks. When the rye whiskey made there ran out, Beam simply used the rye whiskey it was already making for Jim Beam Rye. Beam has done little with the brand except continue to make and distribute it.

You would expect Old Overholt to taste like Jim Beam Rye and it does. It tastes like it may be selected for more tannic barrel notes, because it has a bit more bite.

Rye production in Kentucky didn’t begin in the 1980s, when the last of the Eastern rye distilleries shut down. Even before Prohibition, Kentucky distilleries like the ones operated by Beam family members routinely made both bourbon and rye, so the Beam rye recipe probably has an old pedigree within the family. The whiskey has its detractors, but it is a legitimate style.

I’ve never had a problem finishing a bottle of it.

The 'What Happened To Old Crow" Story.

One of the most unusual stories I heard when I was working on the documentary "Made and Bottled in Kentucky (1991-92) was told by a man who identified himself as the last master distiller at Old Crow and who was by then a Beam employee working at Forks of Elkorn (formerly Old Grand-Dad and now Beam's Frankfort maturation and bottling facility), which is where Beam stuck all of the National production people it retained.

They had permission to show me around Old Taylor and Old Crow, then in ruins but still owned by Jim Beam as a result of the 1987 acquisition of National Distillers. It was just me and a couple of these old National guys. I wasn't shooting, just researching. There was no one with us from Beam PR.

This gentleman told me that in the 1960s, National enlarged the Old Crow plant and accidentally altered the percentage of setback they were using to condition their mash. He said this completely screwed up the flavor of the whiskey. Everyone, including he and the distillery tasting panel, told management it tasted wrong, but at that point they were making it as fast as they could and selling all they could make, so nothing was ever done to fix it.

A few years later, when the bottom fell out of the bourbon business, it was worse for Crow than any other major brand; double-digit share and sales losses every year. He said they finally figured out what the problem was and fixed it a couple of years before Beam bought the place, so for the last few years of production the whiskey from that plant was good.

I've never found another source who could either confirm or dispute that story.

Sold For Parts.

What's worse than being sold? Being sold for parts. Maybe not. Dead is dead.

Old Crow is a brand of bourbon whiskey. The distillery where it was made from 1878 until 1987 is being demolished. You can find out how to buy some of the pieces here.

Old Crow today is a bottom-shelf product but once it was considered the finest whiskey in the land. United States Senators asked for it by name. It was one of the first whiskey brands and, as such, one of the first branded products of any kind.

Old Crow was not the first American whiskey but it was one of the first to be sold under a brand name. Before Old Crow, whiskey was a commodity. People only rarely drank the product of one distillery. Instead, distilleries sold to distributors, who combined spirits from several plants, filtered it through charcoal or bone dust, then treated and flavored it in various other ways before selling it to the public, generally by the barrel. A saloon or general store would buy a barrel. If I wanted some whiskey, I would take my own ceramic jug or other container down to the store and fill 'er up.

Sometime in the 1840s, James C. Crow, physician and distiller; and his employer, Oscar Pepper, distillery owner; began to sell their whiskey by name, either as Old Pepper or Old Crow. Pepper continued to sell Old Crow after Crow's death in 1856. Even though the distiller was dead, his whiskey only grew in popularity. When Pepper died too his son sold the distillery and the Old Crow brand. A few years later, the distillery went one way and the brand went another. A new Old Crow Distillery was built close to Frankfort--that's the one they're tearing down now. The original one is today's Woodford Reserve.

After Prohibition, Old Crow was the flagship brand of National Distillers and the #1 bourbon in a country that, in those days, didn't drink much other than bourbon. When bourbon tanked in the 1970s, no brand fell harder than Old Crow. By the time Jim Beam bought National in 1987, it had reached its present lowly condition.

Jim Beam got the Crow distillery, and several others, when it bought National. It closed them all immediately. (There was a whiskey glut.) For awhile, Beam used the warehouses at Old Crow, and at Old Taylor next door, but they didn't age very well because of their location. Whiskey warehouses in the country tend to be on hills, for air circulation. Crow and Taylor are in a narrow valley.

So when the whiskey that was put there originally aged out, they didn't put any new whiskey in. Years went by and the buildings and grounds deteriorated. Roofs caved in, brick walls collapsed. Beam sold Taylor first. It has had several owners since but no one has done anything much with it. Not long ago, Beam sold Crow to these guys.

Beam still owns the Old Crow brand. Here's what I'd love to see them do. Take one more look at the Old Crow site. Pick one cool thing. Pick two if you want, but pick at least one. I don't care what it is. Maybe it's that big limestone sign. I don't even care. Pick one cool thing and find a home for it, somewhere people can see it, like at Clermont where you have the visitors center. It wouldn't have to cost very much. I'm talking about bricks and stone, something that's already been outside for a century and can stay outside. Something that doesn't need a building. Do the same thing with Old Taylor and Old Grand-Dad. Is there anything left at Old Overholt?

These companies all say they care about the history. Show us how much you care.