More on Pinnacle; A Chat with Bill Newlands

FILED APRIL 23, 2012

Dear Client:

The big news today, and perhaps one of the biggest stories of the year, is that Beam Inc has struck an agreement to acquire Pinnacle Vodka and Calico Jack for $605 million from White Rock Distillers. If everything goes according to plan, it is expected to close in the coming months during the second quarter of 2012.

A big strategy of Beam's is to drive growth through innovations and fast-growing categories. Just think: its other two big recent acquisitions were Skinnygirl in March 2011 and Cooley's Irish Whiskey in December 2011 for $95 million. Those got Beam in the fast-growing low calorie, prepared cocktail and Irish whiskey categories. And that's not to mention all their recent organic innovations with whiskey (Devil's Cut, Maker's 46, Red Stag Black Cherry, Honey Tea and Spiced), the Pucker flavors (Lemonade Lust, Raspberry Rave, Sour Apple Sass, Grape Gone Wild, Cherry Tease and Citrus Squeeze), Courvoisier (Rose and C by Courvoisier) and Skinnygirl extensions (Sangria and White Cranberry Cosmo RTD flavors, red, blush and white wine, and vodka with non-flavored Bare Naked, and Tangerine, Island Coconut and Cucumber flavors).

"We won't feel constrained in terms of the scale," chief Matt Shattock told Bloomberg in an interview in September. And clearly they are acting on that statement.

BEAM TAKES BIG STEP IN VODKA. Pinnacle alone is expected to exceed 3 million cases this year, which gives Beam considerable additional scale. It also strengthens their position in the vodka category, particularly in flavors (driven by Whipped) and mid-priced imports. The flavored vodka category grew volumes by +21.3% in the 52-weeks ending March 3, gaining +0.8 market share points, according to Nielsen off-premise scans. The unflavored vodka category, meanwhile, grew +2.1%, losing -0.4 market share points. The unflavored category is much larger, but clearly the growth is in flavors. However, Pinnacle's flagship offering remained the fastest growing non-flavored imported vodka in 2011, with volumes up over +20% last year.

Recall Beam was a contender for Absolut Vodka back in 2008, which it distributed in the US, but Pernod Ricard eventually won the race by purchasing Vin & Sprit for $9 billion. Then Beam acquired Effen Vodka from Sazerac in 2009 and also created its own vodka brand, Pucker, in 2011. They join premium Vox and value-priced Kamchatka and Wolfschmidt. So while Beam has a presence in vodka, this is a big step forward.

Earlier this month White Rock president Bill Dabbelt told WSD they had plans to launch Pineapple, Peach and Blackberry flavors this year, joining their new Atomic Hots, Gummy and Cookie Dough Pinnacle flavors. "We're also looking at seasonal flavors, limited edition," he said. We'll see if that plan continues under Beam.

THE CALICO JACK FACTOR. While Pinnacle clearly gives Beam an edge in vodka, Calico Jack helps them in the important flavored rum category. Largely driven by spiced rum, the total flavored rum category grew volumes by +5.7% in the 52-weeks, while unflavored rum declined -1.9%.

The Calico Jack line gives Beam a 70-proof spiced version, a 42-proof flavored version and a 94-proof spiced version. While the spiced and high-proof rum categories are doing well, Calico Jack's "biggest growth is coming from the 42-proof flavors. Those are in a frosted bottle, a very premium presentation," said Bill. Coconut is its top seller, followed by Pineapple, Cherry, Caked and Whipped.

WHAT THIS MEANS FOR WHITE ROCK. "I think one of the biggest challenges we always face is being a relatively small company that is dominated by global giants. That makes it more difficult to compete at the distribution level," Bill told WSD. So Beam has an advantage with Pinnacle and Calico Jack where White Rock did not.

But where will White Rock go from here? The company has been in a selling mood of late. Recall in September they sold 32 brands to Sazerac, including Tortilla, Desert Island, Kapali, Ryans, Fire Water, Ice 101, Barbarossa, Ice Box, Mt Royal and others. The price was not disclosed. And that was after they sold Three Olives to Proximo in 2007.

Moving forward they have promising brands with El Charro, Epic Vodka and Chocolate Valley, among others. This company is known for developing share-stealing brands from the ground up, so maybe it's a matter of time before we see the next Pinnacle.

WHAT THIS MEANS FOR BEAM. Beam has been the subject of takeover rumors since it became a standalone spirits company, but this recent deal might quiet speculation. At the same time, SunTrust Robinson Humphrey analyst William Chappell said: "We believe this deal would only enhance its attractiveness to potential suitors," reports Reuters. Meanwhile, Beam management has remained adamant that it will remain an independent spirits company.

A TALK WITH BILL NEWLANDS

After news of the Beam/White Rock deal surfaced this morning, WSD caught up with Bill Newlands, president of Beam North America, for more color. Here's what he had to say:

WINE & SPIRITS DAILY: What are Beam's plans for Pinnacle and Calico Jack moving forward?

BILL NEWLANDS: The team at White Rock has done an outstanding job in quickly growing Pinnacle to be the fourth largest imported vodka in the U.S. Consumers love this brand, love the flavors, and love the affordable premium price point.

Once the transaction closes, which is expected in the second quarter, we want to take this brand to the next level through a strategic and increased investment behind the Pinnacle brand. We will be concentrating on accelerating Pinnacle's already explosive growth not only throughout the U.S., but also in key global markets.

Lastly, we see great opportunity in taking the brand to the next level through continuing to introduce new flavors to the line-up. We have a strong Innovation team at Beam and will be opening our new R&D Center in Kentucky later this year. We definitely see potential in continuing to expand this line into new and interesting variants that are consumer trend- forward.

WSD: Are Beam and Pinnacle/Calico Jack currently in many of the same distribution houses in the US, or will the acquisition require a big transition?

BILL: This acquisition obviously enhances our scale in vodka. We will be fully assessing the route-to- market on the brand as we continue to drive increased focus and dedication on our business. We intend to seize every opportunity to expand distribution for these brands in both the on- and off-premise and take them to the next level.

WSD: How does this change things for Beam in the US on a competitive level?

BILL: Beam is already the fastest growing spirits company in the U.S., and we couldn't be more pleased to add the fastest growing spirits brand, Pinnacle, to our Beam family of brands.

Pinnacle is an excellent strategic fit for Beam, giving us a strong and exciting growth platform in the sweet-spot of the attractive vodka category. With Effen, Pucker, Skinnygirl Vodka and Vox rounding out our premium Vodka portfolio, we have brands to meet all consumer needs from low-calorie, to flavors to super premium. With Pinnacle, we will be a much stronger player in the large - and ever-growing - vodka category.

Likewise, Calico Jack is a terrific complement to our Cruzan Rum business. Calico Jack is a great quality, great tasting liquid and will be price positioned between Cruzan and Ronrico. It definitely has opportunity for growth in the future.

WSD: Beam has recently entered the fastest growing categories (low-calorie RTDs, Irish whiskey, spiced rum and flavored vodka with Pinnacle) through acquisitions. Can we expect any other such acquisitions?

BILL: We will continue to look for opportunities to accelerate our profitable growth at Beam through innovation, as well as building our core business in our Power Brands and Rising Stars, led by Bourbon and Tequila. While our first priority remains growing the brands that we have, we've always said that if an opportunity presents itself that makes sense to our business and aligns with our growth strategy, we will consider it. Pinnacle does all of that and more.

WSD: Thank you for your time.

BANFI JOINS RNDC IN FLORIDA AND SOUTH CAROLINA

Banfi Vintners has pulled out of Charmer Sunbelt and appointed Republic National Distributing Company (RNDC) its exclusive distributor in Florida and South Carolina, effective June 1, 2012. It is transitioning over from CSG's Ben Arnold Beverage Co. in South Carolina and Premier Beverage in Florida. All or part of the Banfi portfolio will now be represented in 17 of the 22 states in which RNDC operates, making RNDC Banfi's leading wholesale partner in the US.

This is just the latest news coming from Banfi. You'll recall they announced earlier this month intentions to purchase Kenwood Vineyards from F. Korbel and Bros. Korbel took on Kenwood in 1999 when it was producing less than 300,000 cases. Since then it has grown to over 550,000 cases in 2011. The sale is expected to close in June.

WASHINGTON LIQUOR STORE AUCTION CLOSES

Friday was the last day for bidders in Washington to compete for the rights to sell spirits at the 167 state-owned liquor stores. Starting June 1, these stores, and about 160 others in contract with the state, will begin operating as private retailers courtesy of I-1183, in addition to hundreds of other retailers including Target, Costco and BevMo that have applied for liquor licenses, reported The Seattle Times.

Bids started off slow, hovering at $3.5 million, but a spokesman for the WLCB Brian Smith said the numbers jumped to $7 million in less than 48 hours. In total $30.75 million was collected in winning bids, with 121 individual bidders earning the rights to these stores, according to AP. The most expensive bid went for $750,100 while the lowest winning bid was for $49,600.

The winning bidders gain the rights to run liquor store in their location, but the price does not include the inventory or the lease.

Of course, all this could be overturned if the Washington Supreme Court sides with initiative opponents suing the state. The state high court will hear arguments May 17.

RUSSIAN STANDARD ALLIES WITH CEDC

You'll recall in November Russian Standard acquired a 9.9% majority stake in Central European Distribution Corp in a "strategic investment." At the time, Citigroup declared CEDC "a potential takeover target" based on press reports and the company's "anti-takeover measures."

Now, Russian Standard Corp has agreed to form an alliance with CEDC to help them address financial obligations. Russian Standard will invest $100 million in the company by purchasing both newly issued common stock and notes that are exchangeable into common share upon shareholder approval. Russian Standard will then hold about 28% of CEDC's outstanding common stock. CEDC is required to use the proceeds of these investments to retire debt that is due next year.

European chief William V. Carey said, "Our partnership...will not only benefit CEDC from the financial and business side but with Mr. Tariko's vast experience in the Russian spirits market, he will represent valuable support for management and the board in strengthening CEDC's position in the Russian market, as well as in international markets."

WSD BRIEF:

USVI OFFERS CRUZAN HIGHER RUM SUBSIDY. The U.S. Virgin Islands says it will raise the portion of rum cover-over subsidies it gives to Beam Inc.'s Cruzan Rum facility in St. Croix from 18% to 25%, reports the Associated Press.


Until tomorrow, Megan

"Personally I'm always ready to learn, although I do not always like being taught."
Sir Winston Churchill

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