This article is part of our Rising Star portfolio series.
The alcohol division at Fortune Brands (NYSE: FO ) enjoys the enviable pleasure of popular products and at least two rivals -- Diageo (NYSE: DEO ) and Pernod Ricard -- that are interested in acquiring it. But what is that division worth?
Fortune Brands is in the midst of a major restructuring. The company agreed to sell its golf division, and the home and security business is slated for spinoff later this year. The remaining spirits business will be renamed Beam Inc. and trade under the BEAM ticker.
Diageo looks like a good fit for the Fortune unit. The U.K. giant could leverage its distribution network with Fortune's bourbons -- namely, Jim Beam -- in a bid to create a global bourbon brand that can play against Brown-Forman's (NYSE: BF-B ) Jack Daniel's. Diageo also lacks a significant bourbon player, and strategic assets are in short supply as consolidation has hit the industry over the past decade.
So what's it worth?
The golf division sold for $1.2 billion, about 10.5 times EBITDA and one time sales. That was about in line with what I was expecting. The home and security business may be a bit tougher to value.
In the economic boom, that unit earned even more than the spirits division, topping out at nearly $700 million in operating profit in 2006 before riding into the negative in 2008. The spirits division has been more consistent, with operating profit hitting $767 million in 2007 before bottoming out at $485 million in 2009.
In its recently filed prospectus, the company suggested that the home and security business would have about $520 million in net debt and $2.2 billion in equity, for a total capitalization of $2.7 billion. But the company hedges its position and says that indebtedness could change before the spin, which is scheduled for later this year. It doesn't seem like the spinoff could carry much debt, given the tenuous economic and housing situation.
Given the unit's depressed financials, it could be better to either look at the unit by assets or by using a prior year's EBITDA to give some idea of what it could be worth. Using its average EBITDA for the four years leading up to 2006, it generated an average $715 million.
Total Enterprise Value
But a safer way might be to assume that it's worth one time its assets, which would come to $3.7 billion. And that's after substantial writedowns from more than $5 billion in 2006 and 2007. I've seen value estimates elsewhere of $4 billion.
Subtracting $3.7 billion and the price of the golf business from Fortune's enterprise value leaves $8.6 billion. That comes to about 13.4 times the spirits unit's trailing EBITDA. Compare that to deals over the last decade, which have averaged around a 15 multiple. That multiple is near the Allied Domecq takeover but much less than the 25 times that Bacardi paid for Grey Goose. And Pernod Ricard also let the purse strings go with its nearly 21 multiple for Absolut vodka a few years ago. Also, Diageo picked up Turkish player Mey Icki for about 10.5 times earlier this year.
Playing with the numbers a little bit, let's assume the home and security business is worth $4.3 billion. Let's also use the spirits division EBITDA from 2006 (the year before its peak), or $732 million. That would imply a valuation at 10.9 EBITDA for the spirits, at the low end of that comparables range. If we can get a 14 times multiple on the spirits division and $3.7 billion on home and security, then it looks like the stock could have upside of about 20%.
So I'm considering the stock for my Rising Star portfolio, and it didn't hurt that Bill Ackman recently announced an addition to his stake in the company. Interested in Fortune Brands or have another stock to share? Join me on my discussion board and follow me on Twitter (@TMFRoyal).