Fortune Brands Inc.'s (FO) decision to sell its U.S. wine business would make it easier for the company to buy Sweden's Vin & Sprit AB, the maker of Absolut vodka, which is considered a prize.
Fortune - which Monday announced that it would sell its U.S. wine business to Constellation Brands Inc. (STZ) for $885 million - has already expressed an interest in buying V&S. But buying the maker of Absolut and other spirits may not be easy - Fortune will come up against a long list of competitors, including international alcohol companies such as Pernod Ricard SA (12069.FR) that are also interested in the Swedish company. Still, the Absolut brand is particularly important to Fortune, which currently co-owns a joint venture with Vin & Sprit to distribute Absolut in the U.S. and is part of another broad partnership to distribute the vodka abroad. Some analysts have been concerned that Fortune's business could be hurt if a competitor bought V&S.
The U.S. wine unit sale increases the probability that Fortune Brands will be the buyer of the Absolut Vodka brand from V&S, UBS analyst Kaumil Gajrawala wrote in a research note to investors. "Fortune management has stated they are confident they can finance a deal for Absolut, but we believe this further strengthens their ability to do so independently," he said.
Absolut is seen as a hot brand in the premium spirits industry, and it has come into focus as the Swedish government looks into selling and privatizing several state-owned companies, including V&S. The government hasn't given specifics on how it may proceed with a possible sale. Some analysts in recent months have raised questions about how Fortune Brands would finance a possible acquisition of V&S, although the company has said it has the ability to fund a deal with the Swedish firm.
Bank of America analyst Bryan Spillane said the deal makes sense for Fortune as it strengthens its balance sheet, which would be helpful in the pursuit of V& S. "From an operating perspective, we believe wine is a relatively easy business for Fortune to dislodge as it had minimal integration with its spirits business and has very different efficiency and returns," he said.
Fortune's operations also include spirits, golf equipment and home products. The company sells the wine business at a time when sales have been declining at the company's home and hardware unit due to the downturn in the housing industry. Home products generate a chunk of Fortune's revenue, and the housing slowdown has left the firm more dependent on sales from its spirits business and products such as Jim Beam bourbon. Fortune's third-quarter net income climbed despite a 4% sales decline in its home and hardware unit.
The deal - set to close by year's end - by the world's largest wine maker includes Fortune's Clos du Bois, Geyser Peak and Wild Horse wine brands. The business makes about 2.6 million cases of wine a year and includes more than 1, 500 acres of vineyards in California.
Fortune expects to realize net proceeds of about $840 million after taxes and an after-tax gain of $50 million to $60 million. The company anticipates the deal slightly adding to 2008 earnings.
"Because the wine industry is lower margin and more capital-intensive than spirits, it's naturally a lower return segment relative to our spirits business, " said Fortune Chairman and Chief Executive Norm Wesley. "This sale increases our financial flexibility and will enable us to more sharply focus resources on the higher return premium spirits segment of our business."
Fortune said the decision to sell the wine business came after a strategic review of that business.
Fortune added that "because (its) spirits and wine brands each have separate sales organizations," it does not foresee the acquisition disrupting sales in its spirits portfolio.
Constellation said the deal should modestly cut into fiscal 2008 earnings and slightly add to profit in fiscal 2009.
Bank of America said its initial view of this deal was mixed for Constellation. The Fortune wine assets are attractive in terms of retail price points and margins, but the downside is Constellation's willingness to take on more debt given its already high leverage ratios, the firm said.
Fortune shares were recently up 1.59, or 2%, to 80.76. Constellation's were down 3 cents to 22.96.
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