Activist investor Bill Ackman has been given a four-week deadline to propose changes to the board of Fortune Brands, which could lead to the break-up of the whiskey-to-golf balls US conglomerate in which he has accumulated an 11 percent stake.
Since disclosing his holding last month, Mr Ackman, founder of Pershing Square Capital Management, has kept quiet about his plans. However, his record suggests he wants Fortune’s board to explore breaking up its stable of consumer brands starting with its spirits business, which includes Jim Beam whiskey and Courvoisier cognac.
In the past month, he is believed to have held discussions with Fortune’s management about its structure. If he ultimately concludes that management has not been aggressive enough about a break-up, he has approximately four weeks to file a slate of his own candidates for the company’s board, to be voted on at the general meeting in April.
According to analysts and investment bankers who have been following the company, Mr Ackman will not be able to come to his own conclusions about the best structure for Fortune until he has an opportunity to review the tax basis on which the company’s assets are being held.
“For someone to estimate the value of the brands, it’s nearly impossible without knowing the tax books,” said Peter Lisnic, an analyst at investment manager Robert W. Baird.
The sale of Jim Beam could generate a tax penalty large enough to render the transaction unpalatable, said Mr Lisnic.
Should the company decide to sell off its liquor business, the most obvious acquirers would be Diageo of the UK or Pernod Ricard of France. Diageo already has the ability to make a cash offer, said one US-based banker, while Pernod would probably need 18 months to pay down the debt it took on to buy Vin & Spirit, owner of the Absolut vodka brand, in 2008. Pernod has said its goal is to reduce its net debt/earnings before interest depreciation and amortisation ratio to 4 by that time.
If, the banker continued, Fortune management was willing to wait 18 months, a competitive bidding situation between Diageo and Pernod could generate the best result for shareholders.
“If it [Fortune Brands] was separately listed it would be a chip in the consolidation of the drinks sector,” said one European banker. “Partly because, like Cadbury, it’s independently listed when everything else is either fully consolidated or there are barriers to ownership, like family control.”
Diageo has headroom to make an acquisition. For such a cash-generative industry, its net debt/earnings before interest, tax, depreciation and amortisation of 2.3 times is considered low.
“People wondered what Fortune’s strategy was for ages,” said one banker. “But this is the first time there’s been a catalyst [for change].”
Mr Lisnic said the company’s management team had a strong record of creating shareholder value and that if Mr Ackman could present an innovative idea to unlock value, Fortune Brands would be likely to support it.