Fortune Brands split is poison pill antidote

December 9, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Fortune Brands has found an antidote for its poison pill. The odd combination of liquor, golf clubs and faucets never made sense. The conglomerate structure also dissuaded specialist rivals from making takeover bids. Carving up the company should solve the problem.

Fortune says it has been considering the merits of a break-up for years. But it took the arrival of activist investor Bill Ackman to be a catalyst. Each of the three pieces will be more attractive on its own or to suitors. The spirits business, in particular, should now lure in a bid from Diageo.

The company says it will take a few more months to execute its plan. But the blueprint looks to be pretty well drawn. The home and security division is to be spun off. The golf unit, maker of Titleist gear, will be sold or separated. And the arm that owns libation brands would then stand alone as a listed company.

Not surprisingly, Wall Street raised a glass to the idea. The shares are up 19 percent since Ackman’s stake in the company became known. Golfing and home products may find interested buyers or do well alone, and the booze business represents the biggest chunk of Fortune’s value. It accounts for about two-thirds of profit and seemingly has a ready buyer. Jim Beam and Maker’s Mark would fit snugly inside drinks powerhouse Diageo, which has long had a taste for bourbon.

There would be a residual, though smaller, conglomerate problem. Fortune also owns mid-shelf liquor brands such as Aftershock cinnamon schnapps and Old Overholt rye, which Diageo presumably could live without. Yet this represents a much easier problem to work around than dismantling the entire company.

Consider the valuation dynamics. Spirits are expected to generate $686 million of EBITDA this year for Fortune, according to Merrill Lynch research. Putting the business on a multiple of 15 would equate to a price tag of a little more than $10 billion. That’s roughly the company’s entire current market capitalization. Still, it’s cheaper than paying a control premium for all of Fortune and then having to unload unwanted divisions piecemeal. It’s certainly enough to invite a round of toasts for Ackman and Fortune.

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