Suntory buys Beam for $13.6 billion

Merger Monday brought a huge announcement in the liquor world. Japanese whiskey maker Suntory  is buying Beam Inc. for $13.6 billion. Since it’s the first large deal of the year and such an iconic American product, the coverage was extensive.

Writing for the New York Times, Michael J. de la Merced and David Gelles had one of the best leads:

Few spirits are as American as bourbon. But the maker of some of whiskey’s most iconic brands, including Jim Beam and Maker’s Mark, will soon belong to an acquisitive Japanese beverage maker.

In a deal announced on Monday to buy Beam Inc. for $13.6 billion, Suntory of Japan struck one of the biggest takeovers in the liquor business in years, transforming it into the third-largest distiller globally.

The acquisition may also signal the last mega-deal in the spirits industry for some time. Beam has long been considered the most attractive big target for consolidation. Rivals like Brown-Forman, the maker of Jack Daniel’s, are controlled by families, performing well on their own and have shown little interest in potential takeovers.

The giants of the business — Diageo of Britain and Pernod Ricard of France — face many constraints on their ability to grow by mergers. While the two companies had considered bidding for the American whiskey producer, neither ultimately moved ahead.

The Wall Street Journal story by Mike Esterl in Atlanta and Hiroyuki Kachi in Tokyo had excellent background on the growing market for American whiskey:

Beam is positioned squarely in a part of the liquor business experiencing a powerful global upswing: bourbon whiskey. The traditional American spirit is made mostly from corn, aged in charred oak barrels and typically hails from Kentucky. Its popularity is building as some consumers grow tired of vodka, the top-selling U.S. spirit, and gravitate toward distillers of brown spirits with more than centurylong domestic roots.

Long in the doldrums, U.S. bourbon has made a comeback in the past decade and production in 2012 rose above one million barrels for the first time since 1973. Distillers have invested roughly $300 million to boost capacity since 2011. North American whiskey—including bourbon, Tennessee and Canadian whiskeys—accounted for more than half of the total growth in the $21 billion U.S. spirits market in the 52 weeks ended Oct. 12, 2013, according to store tracker Nielsen.

Unlike vodka, a popular “white” spirit with roots in Europe, bourbon is quintessentially American and has been re-popularized through television shows such as “Mad Men,” which is set in the 1960s and features then-advertising executives with rock glasses in hand.

Bourbon makers routinely play up their brands’ long local histories. Beam traces its flagship bourbon to 1795, when Jacob Beam sold his first barrel, the first of seven generations and 30 family members of master distillers. One of them, James or “Jim” Beam, restarted production after Prohibition was repealed in 1933.

In recent years, dozens of tiny “craft” distillers have also sprung up across the U.S. to capitalize on the growing thirst for brown spirits such as bourbon. Some bourbon brands—including Maker’s Mark—have said they are struggling to keep up with demand.

Bloomberg’s Clementine Fletcher and Leslie Patton wrote that Japanese companies are looking to increase overseas growth:

Suntory, the maker of Yamazaki whiskey and Premium Malt’s beer, is seeking to boost overseas growth as the population in its home country shrinks and ages. The company in 2012 had explored an offer for Beam alongside Diageo Plc. (DGE) Beam, whose largest shareholder is activist investor Bill Ackman’s hedge fund, in 2012 got 59 percent of its revenue from North America and 21 percent from Europe, the Middle East and Africa.

 “Strategically, it makes sense for Suntory,” said Trevor Stirling, an analyst at Sanford C. Bernstein & Co. in London. “I’m a little surprised they decided to go it alone, but at the moment there are low yen interest rates.”

Beam rose 25 percent to $83.42 at the close in New York yesterday. The advance would mean a $342.5 million gain for Ackman’s Pershing Square Capital Management LP if its stake is unchanged from Sept. 30. The shares traded as high as $83.61, topping the offer price, indicating some investors expected competing bids. Deerfield, Illinois-based Beam gained 11 percent last year.

The takeover would be the largest overseas acquisition by a Japanese company since SoftBank Corp. (9984) acquired Sprint for $21.6 billion in a deal announced in 2012.

Fueled by a strong currency, Japanese companies embarked on an overseas buying spree that peaked with $113.5 billion worth of deals announced that year, data compiled by Bloomberg show. With the yen weakening, the value of overseas deals announced last year dropped to about $46 billion, the data show.

David Gelles wrote a sidebar for the New York Times pointing out that there might not be too many more deals like this one:

A big whiskey acquisition is a shot in the arm for the global spirits industry, but there may not be many more substantial liquor deals to strike.

By agreeing to acquire Jim Beam for $13.6 billion on Monday, Suntory, a privately held Japanese food and beverage producer, snatched up one of the most attractive targets left on the market, and will assume the mantle of the third-largest distiller globally.

With brands including Maker’s Mark and Jim Beam bourbon, Beam had been riding high in recent years.

“It’s a good deal for Beam shareholders,” said John Faucher, JPMorgan analyst. “Looking at the rapid growth we’ve seen in bourbon over the recent years, Beam is doing good job seizing the moment, striking while the iron is hot.”

But Beam is a company at least two other global spirits groups would have liked to own.

The Beam brands are incredibly valuable and Suntory looks to have edged out several others who would have liked to own it. I just hope that Suntory is going to use the Beam distribution network to increase its reach in the U.S. The more whiskey, the better.