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Better Off Apart?
Fortune Brands (FO), a major consumer goods conglomerate, has announced it will be breaking up its three primary businesses. The company operates the fourth largest spirits company in the world, behind U.K.-based Diageo plc (DEO), India’s United Spirits, Ltd. (foreign), and Paris-based Pernod Ricard SA. In addition, Fortune has a home and security division that manufactures leading brand products and services, such as Moen faucets and ADT home security. The company’s third division consists of top golf equipment brands, including Titleist and Foot Joy.
Following the recent recession, management began looking at the viability of each unit on a stand-alone basis. Fortune emerged from the tumultuous period in a stronger condition than management had anticipated, leading the company to believe that this may be an opportune time to split up the units and have them operate independently. Indeed, an initial proposal was made and approved by the Board of Directors. Still, the separation process remains under regulatory review.
Under the terms set forth in the original proposal, the spirits business would continue to operate under the name Fortune Brands, Inc. as an independent, publicly traded entity. The home and security business would be spun off to existing Fortune shareholders and also operate as an independent, publicly traded business with a name that has yet to be disclosed. The company has not yet announced its plans for the golf business. The timeline for the proposed break up has not been determined.
This move may well create greater value for shareholders. For some time there has been speculation about a possible takeover bid for the spirits business from the likes of Diageo, that is, if a break up were to occur. Indeed, the pace of this separation initiative likely accelerated once renowned investor William Ackman purchased a sizable stake in the company, via his firm, Pershing Square Capital Management. The spirits business is a prime takeover candidate for an industry leader like Diageo given Fortune’s established roster of successful brands that would likely complement the former’s equally popular lineup of premium products. Too, the spirit unit’s solid revenue and margin growth (excluding one-off items) ought to make it a respectable M&A prospect. A similar case can be made for the other two divisions as well. Strong top-line and operating-profit rebounds last year, combined with considerable brand recognition and prestige, are factors that will likely spark notable interest from several suitors, and may well prop up the multiples of the separate equities, assuming the split takes place.
All told, we believe the individual units stand to benefit from more focused management teams if the separation is completed. Each business would have its respective management team that would place emphasis on strategic measures and operational efficiency specifically targeting growth in the respective marketplaces. Moreover, given Fortune’s stronger cash flow, it will likely retain the bulk of the debt load, which would be good news for shareholders of the other two units. Bondholders on the other hand may be a bit concerned, as that heavy debt burden could weaken Fortune’s credit rating. Nonetheless, we contend that the pros outweigh the cons in this instance and the break up ought to lead to a happy ending for all parties involved.
At the time that this article’s writing, the author did not have positions in any of the companies mentioned.