Conglomerates are funny things. It seems that if a company can get large enough, say on the order of Danaher (NYSE:DHR) or United Technologies (NYSE:UTX), investors often make their peace with the corporate structure and go about their business. Smaller companies get quite a bit more scrutiny when they are in multiple business lines, though, and the peculiar combination of booze, golf clubs, faucets and front doors always seemed to fuel speculation that Fortune Brands (NYSE:FO) would eventually break itself up into its constituent parts. Years of speculation have finally come true, as the company announced Wednesday morning that it would launch just such a plan.

IN PICTURES: 5 Tips To Reading The Balance Sheet

From One to Three
At this point, it seems as though the board of directors at Fortune Brands has only really decided on the big-picture aspects of the plan. Fortune Brands itself will continue as a publicly-traded company focused on the spirits business. The home and security business (with its leading businesses in faucets, cabinets and doors) will be spun-off to shareholders and become a separate publicly-traded company. The fate of the golf business is less certain - the company will either spin this business off as another publicly-traded entity or sell it outright.

One of the biggest questions yet to be answered is the disposition of the company's current debt, and that is a $3.6 billion question. While the company no doubt has internal assignments of the debt to various business units, there is no rule that I am aware of that says the company must maintain those assignments in the spin-out. (For more, see Cashing In On Corporate Restructuring.)

What that means, then, is that it might make more sense for the spirits business to take more than its share of debt - it is a stable cash-generating business and it is normal in the industry for these businesses to have higher-than-average debt loads. Moreover, that would give the company the option to "pretty up" the home/security business and spin it out with a more favorable valuation - to say nothing of the fact that a low-debt spin-out would leave that business in good shape to take advantage of the recovery in home construction and remodeling (whenever that comes). (For more, see Companies Spin Off To Boost Stock Prices.)

Challenges Will Remain
Although splitting up Fortune Brands will certainly make life easier for analysts and some investors, it is not necessarily a boon to the businesses themselves. Compared to Diageo (NYSE:DEO), Bacardi and Pernod Ricard, Fortune Brands is relatively small (though about the same size as Brown-Forman (NYSE:BF.B) on a revenue basis). In an industry where size and scale matter, Fortune may ultimately end up as someone else's target or may need to acquire other brands to achieve a more competitive scale. Likewise, the golf business may be better off as part of Adidas, Nike (NYSE:NKE) or Mizuno than its own separate company - at least if the track record of Callaway Golf (NYSE:ELY) is a fair comparison for a stand-alone golf business.

In comparison, the home/security business looks pretty solid - though it is certainly smaller than Masco (NYSE:MAS), Stanley Black & Decker (NYSE:SWK) and Newell (NYSE:NWL), market-leading brands like Moen, Aristokraft, Kitchen Craft and Therma-Tru count for a lot.

The Bottom Line
Unfortunately for shareholders, this move is not likely to lead to a burst of revaluation in the stock of Fortune Brands. That is the rub with a somewhat efficient market - the market had pretty much baked in the expectations of this kind of move and the valuation already reflected it. While shareholders may well benefit in the long-term from this reorganization, the price discovery process of the market suggests that there will not be any free lunches in the short term. (For more, see Conglomerates: Cash Cows Or Corporate Chaos?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Microsoft's Return on Equity (ROE) (MSFT)

    Discover a detailed analysis of Microsoft's historical return on equity, and learn how its ROE stacks up to its competitors in the tech industry.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  5. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  6. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  7. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  8. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  9. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  10. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center