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

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  4. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  5. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  6. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  7. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  8. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  9. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  10. Stock Analysis

    The Biggest Risks of Investing in FireEye Stock

    Examine the current state of FireEye, Inc., and learn about some of the biggest risks of investing in this cybersecurity company's stock.
  1. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!