Speculation Rises Over a Diageo-Suntory Bid for Beam


Dear Client:

New reports surfaced over the weekend claiming that Diageo held meetings with Japanese company Suntory in the spring and summer about forming a partnership to acquire Beam Inc. There's a lot of 'he said, she said,' but we'll try to put it in perspective. Since Beam became a standalone spirits company, there have been lots of different acquisition scenarios thrown out by analysts and journalists citing "unnamed sources." One of the most popular is that Diageo, Pernod, Campari and/or Bacardi could form a consortium and split up Beam amongst themselves. Talk of Suntory is a new one.

An unnamed source says Diageo has been exploring several avenues for how to acquire some of Beam's brands since the beginning of the year, reports The Telegraph. Diageo and Suntory reportedly met this summer to talk about potentially buying Beam together, which may allow Diageo to avoid regulatory hurdles. It is also speculated that Diageo spoke with private equity firms about working in partnership to buy Beam. However, no formal offer has been made.

One source believes the hold up is that Diageo only wants to pay $65 a share, which may not be enough since Beam's shares on Friday were $59.73. You may also recall Diageo has a lot of acquisitions on it's plate right now. Last month the company acquired a controlling stake in United Spirits, and its acquisition of Whyte & Mackay as part of the deal is currently under regulatory review. Its negotiations with the Beckmann family regarding Jose Cuervo continue (with the most popular theory being that Diageo will take a minority stake in Cuervo), and you'll recall the company also recently said it would be willing to buy out the remaining 50% stake of Ketel One it doesn't already own.

MORE ON SUNTORY: Suntory is one of Japan's largest drink companies and currently imports Beam's whiskies to the country. Although still anonymous, an official at the company told Bloomberg they are interested in Beam. The official also says Diageo and Suntory are not currently in talks and Suntory is free to buy Beam on its own. Meanwhile, The Telegraph is reporting that Suntory approached other companies about offering a joint bid for Beam after talks with Diageo fizzled in the summer. See, this is a tricky one.

"Speculation around Beam is not new, but had calmed down, and this reignites the debate," David Belaunde, an analyst at Morgan Stanley, said in a note to clients. "While we would not rule out any scenario, we believe regulatory hurdles and other priorities may well limit the role that Diageo, specifically, might be willing to play in the near term."

In the past, Suntory's overseas acquisitions have been for non-alcohol beverages, while its Japanese competitor Kirin Holdings Co. has spent approximately $12 billion to grow its alcohol business outside of the country. You may also recall Suntory's American arm joined DISCUS in January. At the time its coo for North America Yoshihiko Kunimoto said: "Our liquor business in the US is still small, however the U.S. represents a very important and growing market for Suntory, and DISCUS is the global leader in advocating responsible public policy for our industry."

BEAM'S TAKE: Last month Beam ceo Matt Shattock did an interview with The Wall Street Journal where he claimed Beam could stand on it's own. When asked if Beam was a target he said, "We sell about 35 million cases of spirits a year, and I hear just as many rumors, most of which have proven wrong. We are playing this for the long haul as a stand-alone company."

One interesting comment we should remind you of: last month UBS analyst Melissa Earlam concluded in a note to clients that if Diageo did not acquire Cuervo it would pursue Beam. So we ask, does this course of action signal that Diageo will not win over Cuervo?

OUR THOUGHTS. With all these deals on Diageo's plate, we think its likely that aggressively pursuing Beam is not high on their list. Remember, right now Diageo is juggling USL, Ketel One and Cuervo. So while many of Beam's brands are attractive to Diageo, this just may not be the right time. With that said, if other companies are looking to form a partnership and make a play for Beam, we don't think Diageo would idly stand by.


You'll no doubt recall that Southern Wine & Spirits, in its legal bid to become an out-of-state-owned distributor in Missouri, has been suing the state to overturn its residency law, citing the Commerce clause. The state filed back in its own brief, arguing that the "Supreme Court...agreed that the 21st Amendment gave the states virtually complete control over how to structure their liquor wholesale licensing schemes - even to the point of denying licenses to out-of state individuals and entities."

The state won the first round, but Southern appealed. Now, several other entities have filed amicus briefs on the case. Interestingly, a group of states entered the fray with their own amicus brief: Arkansas, Delaware, Mississippi, Nebraska, South Dakota, Texas, and West Virginia.

Their amici zeros in on the fact that Southern had focused on the "core concerns test", which means: does the residency restriction protect the core concerns of the the three-tier system? "But the Granholm Court did not even mention the core concerns test. Indeed, Justice Thomas noted in his dissenting opinion that the majority "sub silentio cast aside that test..... State policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent."

"The residency requirements do not prohibit any disfavored, out-of-state goods from entering the states' borders. Nor do the laws erect regulatory barriers that might dissuade producers from shipping liquor products to the states. The residency laws bear no resemblance to the laws at issued in Granholm, which discriminated against out-of-state wineries and were the product of an ongoing, low-level trade war.'" The brief also tore into Southern's claim that it was not getting fair treatment under the law.

The American Beverage Licensees filed a brief representing the national interests of independent retailers highlighting how the issues raised in this appeal are broader than just the wholesaler tier of a three tier system. "The Granholm Court made clear that its statement that the Twenty-first Amendment did not save "discriminatory" state laws was to be read narrowly. Not only did it speak only of discrimination against producers and products, it explicitly declared the three-tier distribution system "unquestionably legitimate".

The NBWA and the Missouri Beer Wholesalers Association filed an amicus brief as well pointing out that Missouri's residency law survives a Commerce Clause test because it "does not differentiate between instate or out-of-state producers or products. Rather, it simply requires corporate alcohol distributors and their majority owners, directors, and officers to be physically present in the state and more effectively regulated by Missouri's alcohol and taxing authorities." So as you can see, many in the industry do not want to see Southern enter Missouri. Now we wait to see how Southern responds.


PANACHE WHISKEY TO BE DISTRIBUTED BY SWEW. You may recall Panache Beverage recently launched Alibi American Whiskey. The company announced today Domaine Select Wine Estates will act as the national exclusive distributor for the brand in the US. DSWE also currently imports Panache's Wodka Vodka. Alibi was launched in NY, NJ and FL before Thanksgiving. Panache is targeting markets in MA, GA, TX, IL, WA, CT, AZ and NV for 2013.

Until tomorrow, Emily

"Succeeding feels just like failing, only you†re not allowed to stop."
- Maciej Ceglowski

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