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Ever since Fortune Brands spun-off Beam Inc. (NYSE:BEAM) last October, the speculation has been rampant as to what would happen to the newly independent liquor company. Most analysts believe that either Diageo (NYSE:DEO) or Pernod-Ricard (OTC:PDRDY), the largest and second-largest global distillers, respectively, will eventually make a play for the world's sixth-largest company because its Jim Beam and Maker's Mark bourbon brands account for a third of the total volume of bourbon sold in the U.S. It's a great business that would fetch a pretty penny. The average premium paid for spirits companies over $1 billion is 31%, which means as of September 12, it could cost either of the big players as much as 18 times EBITDA - perhaps more.
Now back to Campari. As mentioned in the opening, it's agreed to buy Appleton and various other rum-related brands and assets for $415 million or 15 times EBITDA. While Campari is acquiring the Jamaican company for a fair and reasonable price, the long-term implications of its actions suggest it's getting a bargain. Appleton is the fourth largest global rum brand behind Bacardi, Captain Morgan and Havana Club. In 2011, it shipped 1.2 million 9-liter cases of rum both domestically and internationally. Interestingly, Appleton sells approximately 300,000 cases in Canada, 270,000 in Mexico and just 150,000 in the U.S.
That statistic tells me Campari USA is sitting on a goldmine. In 2011, Campari sold 84,000 cases of Flor de Caña, a third-party Nicaraguan brand. Now I can say from experience that Flor de Caña is an excellent rum. However, if it can sell that many cases in the U.S when working for someone else, imagine what it could do selling its own quality product.
At the very minimum, that U.S number should be equal to the Canadian sales numbers because Havana Club is not even sold in the U.S, so it's only up against Bacardi and Captain Morgan. More importantly, the acquisition fills a big gap in its drinks lineup. The top five categories of premium spirits in order of volume are Vodka, Scotch whisky, Rum, Liqueurs and American whiskey. By adding Appleton to Skyy Vodka, Glen Grant single malt Scotch whisky, Carolans liqueur and Wild Turkey American whiskey, Campari has a least one competitive brand within all five categories. That's a huge boost to its expansion efforts internationally.
Campari will have approximately $1.24 billion in net debt once the deal is completed, which is 2.7 times its trailing twelve months EBITDA as of the end of June. Diageo's current net debt is 2.2 times EBITDA while Pernod-Ricard's is 3.9 times EBITDA. Given that Campari's just made an acquisition that will boost its North American presence and is immediately accretive to earnings, I think its financial situation is exceptionally strong. I'm not sure if it can undertake another acquisition immediately, but it certainly should be in a position to make another major move by the end of 2013. Nevertheless, if an opportunity comes along to fill another gap in its lineup while continuing to strengthen its North American and Asia/Pacific markets, it should jump all over it. Perhaps it could even pick up a brand or two once one of the big boys decides to make its move for Beam.
The Bottom Line
The investment choices available in the liquor business continue to shrink. Once Beam is acquired, there will be one less opportunity to make money from one of the most stable industries anywhere. Everyone looks to Diageo when considering an investment in the liquor business. I'm here to remind you that Campari's most recent move should put it squarely in your sights. If you can't pull the trigger, you might want to consider FolioInvesting's wine, beer and spirits ready-to-go folio, which has averaged a total return of 10.14% over the past five years, 1062 basis points higher than the S&P 500. It doesn't currently own Campari, but if the Italian company keeps making smart moves like the Appleton acquisition, it will soon enough.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.