Is the Beam Acquisition Too Expensive?

Beam seems to be highly valued by Suntory. It has a much higher valuation compared to its peers, including Diageo and Brown-Forman--but is it too expensive?

Jan 28, 2014 at 12:20PM
Consumer Goods

Shares of Beam (UNKNOWN:BEAM.DL) have surged significantly, from more than $66 per share to $83.50 per share, thanks to the company's acquisition by Suntory Holdings. However, many investors are worried about the high valuation that Suntory is placing on Beam. With the deal worth $16 billion, Beam is valued at as much as 20.9 times EBITDA (earnings before interest, taxes, depreciation and amortization).

Let's take a closer look to determine whether or not Suntory has overpriced Beam compared to Diageo (NYSE:DEO) and Brown-Forman (NYSE:BF-A).

Beam is the way to get great exposure to the North American market
Beam is considered one of the global leaders in premium spirits, selling bourbon whiskey, tequila, vodka, cognac, and rum. It owns several well-known brands such as Jim Beam, Sauza Tequila, Pinnacle Vodka, and Courvoisier Cognac. Beam generated most of its sales in North America, accounting for nearly 60% of the total sales in 2012.

While Beam has great exposure in the North American market, Diageo's geographical reach is more diverse. Diageo's biggest business is still North America, but the region accounted for only 33% of its total business. Other regions, including Africa, Eastern Europe, and Turkey, which is grouped as a single region, and Western Europe ranked second and third, representing 20% and 19%, respectively, of Diageo's total sales.  

Brown-Forman, with the famous Jack Daniel's brand, generated 41% of its total sales in the U.S. Europe stood in second place, taking 30% of its total business. Brown-Forman has successfully expanded its business abroad. For the last 10 years, its sales percentage outside the U.S. has grown significantly, from one-third of sales to 59%.

In the past five years, Beam has managed to consistently grow its net revenue, from nearly $1.98 billion in 2008 to nearly $2.66 billion in 2012. With rising revenue, the company also managed to consistently deliver profits. In 2012, it earned $2.48 per share. In 2011, Beam experienced the lowest level of income, at only $0.86 per share. The low earnings in 2011 were due to a $149 million loss in early extinguishment of debt.

Beam is richly valued compared to Diageo and Brown-Forman
Suntory, the Japanese brewing and distilling group, would like to acquire Beam to expand its footprint in the US market. With the acquisition, it would become the third-largest distiller in the world. Moreover, Suntory could add higher-end, more expensive brands such as Knob Creek bourbon, Teacher's Scotch, and Courvoisier cognac. Nobutada Saji, Suntory's chairman, feels bullish about this acquisition: "I believe this combination will create a spirits business with a product portfolio unmatched throughout the world and allow us to achieve further global growth," he said.

This deal seems to be quite sweet for Beam's shareholders, worth as much as 20 times its trailing EBITDA. It has a much higher valuation than both Diageo and Brown-Forman. Diageo, at the current market capitalization of nearly $83.1 billion, is valued at only 15.5 times EV/EBITDA. Brown-Forman has a bit higher valuation than Diageo but is still cheaper than Beam. At $78 per share, the market values Brown-Forman at 17.5 times EV/EBITDA.

Looking forward, Beam would continue to focus on three main strategic areas including creating famous brands,  fueling growth and executing Building Winning Markets strategy to strengthen the distribution in several key emerging markets, including Brazil, China, and India. The company has committed to investing in innovation to drive incremental sales growth higher. Beam has been chosen to be one of the top 25 World's Most Innovative Companies by Forbes. In Building Winning Markets, Beam speeds up its global routes with local partnerships in several countries such as Japan, Mexico, and Poland.

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Last but not least, in order to fuel future growth Beam would continue to reduce costs to enhance the company's efficiency and effectiveness. Via the recent restructuring program, Beam is on track to achieve the cost-savings target of 1% to 2% in cost of goods sold and selling, general, and administrative expenses.

My Foolish take
With as much as 20 times EV/EBITDA, I personally think that Suntory has paid a huge premium for Beam to expand its business footprint in the U.S. It's much more expensive than the median EBITDA multiple, at 13.8, of wine- or liquor-maker acquisitions since 2004.

However, from a different angle, the deal could help Suntory fight against a shrinking home market in Japan, with the declining population, by diversifying geographically.