Drunk, dirty golfer

October 11, 2010

After a round of golf with his Titleist clubs, a guy pops into the clubhouse for a Maker’s Mark neat before rinsing off under a Moen showerhead. That’s about the closest Fortune Brands comes to synergies. No wonder the conglomerate makes such a tempting target for an activist investor.

Shareholders won’t be alone rooting for Bill Ackman, boss of the Pershing Square Capital Management hedge fund, who revealed an 11 percent stake last week, to break Fortune up. Diageo, the biggest booze business in the world, may one day toast him. The company has long wanted to own a major bourbon brand. Fortune has two: Maker’s Mark and Jim Beam.

Hypothetical examples aside, Fortune’s three main divisions – spirits, golf stuff and home products – don’t hang together naturally. And there are potentially better, more motivated owners for them. But drinks account for some two-thirds of Fortune’s profit, so deserves the primary focus.

The group – which also sells Hornitos tequila, Courvoisier cognac and Canadian Club whisky – is expected to generate EBITDA of $635 million this year, according to Longbow Research. At 15 times – less than the 20 times Pernod Ricard paid for Sweden’s Absolut vodka – Diageo’s price tag could come to about $9.5 billion.

Subtract that from Fortune’s enterprise value of $12 billion (an $8.4 billion market cap plus $3.6 billion of debt) and the remaining two divisions would be trading at around four times EBITDA, as estimated by Longbow. Citigroup notes that sporting-goods maker Adidas and home products manufacturers like Masco fetch valuations of between eight and nine times EBITDA.

Diageo would scramble to pay a top-shelf price for a portfolio that includes some less attractive brands, a few in categories it already dominates. But a handful of smaller players like Gruppo Campari have shown an interest in what insiders call “tail brands.” That would allow Diageo to finance part of a deal with divestitures.

It’s too soon to say for sure whether Mr. Ackman wants to carve up Fortune. But with a thirsty buyer waiting, and a corporate strategy best exemplified by a tipsy golfer in need of a shower, the odds are good.

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