On January 13, Suntory Holdings Ltd. announced it would acquire Beam Inc. for $83.50 per share, which is a 25% premium to the January 10 closing price (the 1/10 stock price is the unaffected price before the news of the acquisition was announced and the stock price jumped). The deal, expected to be completed in June, values Beam at 20.5 times EBITDA (earnings before interest, taxes, depreciation, and amortization). Beam’s enterprise value-to-EBTIDA multiple, which is a common financial metric used in valuations, is expensive when considering that median multiple in the industry in the last five years is 12-14 times EBITDA. In addition, it is the fourth highest valuation in the spirits industry in the last decade. To add a little more perspective, this is the largest beverage deal since Inbev acquired the remaining 50% of Modelo SAB for $17.2 billion in 2012. Although Suntory is certainly paying top dollar for Beam, Suntory expects the acquisition will offer them many lucrative growth opportunities.
Suntory produces Yamazaki whiskey and Premium Malt’s Beer, which are household names in Japan. However, Suntory wants exposure overseas where there is high growth compared with slow growth at home due to an aging population. According to the Wall Street Journal, “Suntory Holdings Ltd. tried to cast aside any lingering doubts that its $13.6 billion acquisition of Beam Inc. is overpriced, saying it will successfully capitalize on the overseas brand recognition of the U.S. whiskey maker as it transforms into a global spirits competitor”. In 2011, 80% of Suntory’s revenue came from Japan. Following its acquisition, 60% of Suntory’s revenue is expected to come from the United States. As a result, Suntory’s acquisition of Beam is positioning the firm to be more diversified away from Japan. I believe this is a good decision because it decreases idiosyncratic risk of having most of its revenues be dependent on the health of the Japanese economy.
Beam is also a rare example of a pure play alcohol company, which means it has a single business focus. Suntory, which approached Beam with an unsolicited offer, is demonstrating “strong enthusiasm for forging ahead with its whiskey business”. For Suntory, the scarcity value of a pure play alcohol company might have provided additional incentive to pay a high price. Furthermore, there has been significant growth in spirits within the beverage industry. Suntory’s acquisition of Beam increases its market share in the United States, the world’s biggest spirits market, from 1% to 11%. In the United States, Beam is the second largest whiskey maker behind Jack Daniels. Similar to Jack Daniels, Beam has a very strong brand. According to the Wall Street Journal, “While Suntory’s whiskey products have been gaining aficionados and accolades in the U.S. and Europe, their brand recognition is still much weaker than Beam’s labels… The company therefore hopes the deal will give it strong ammunition in the form of globally recognized brands to embark on an offensive in overseas markets”. The value of a brand is hard to quantify because it is hard to determine what amount of sales or pricing power come from the strength of the brand. Although critics claim Suntory overpaid for Beam, I believe Suntory will benefit from Beam’s strong brand and its exposure in the United States.
Despite the tremendous potential for growth in this acquisition, Suntory will also be taking some calculated risks due to the financing of the deal. Suntory’s acquisition of Beam is an all cash offer, which means Suntory will issue debt. Suntory will need to issue $12 billion in debt and credit agencies have warned that this massive amount might result in a downgrade of Suntory’s debt. Downgrading of debt is never a good thing as it usually increases borrowing costs for the company (lenders demand a higher interest rate to be compensated for the larger perceived risk). However, Suntory should be able to reduce this debt over time and restore its credit rating. If Beam proves to be as profitable as Suntory hopes, then Suntory may be able to pay off this debt sooner than expected.