After Beam Deal, Few Big Liquor Mergers Left

A big whiskey acquisition is a shot in the arm for the global spirits industry, but there may not be many more substantial liquor deals to strike.

By agreeing to acquire Jim Beam for $13.6 billion on Monday, Suntory, a privately held Japanese food and beverage producer, snatched up one of the most attractive targets left on the market, and will assume the mantle of the third-largest distiller globally.

With brands including Maker’s Mark and Jim Beam bourbon, Beam had been riding high in recent years.

“It’s a good deal for Beam shareholders,” said John Faucher, JPMorgan analyst. “Looking at the rapid growth we’ve seen in bourbon over the recent years, Beam is doing good job seizing the moment, striking while the iron is hot.”

But Beam is a company at least two other global spirits groups would have liked to own.

Diageo, the largest distiller in the world, explored a bid for Beam in 2012. An offer was never made, however, and analysts believe it would have been hard to get the approval of antitrust regulators. The consensus among industry watches is that Diageo, with brands including Johnnie Walker, Crown Royal, Smirnoff and Tanqueray, will be hard pressed to add many more premium brands in the United States, the world’s largest liquor market.

Pernod Ricard, the second-largest global distiller, was another potential acquirer of Beam. With brands including Chivas Regal, Jameson and Absolut, buying Beam would have given the company additional market share in the United States. But Pernod is constrained for its own reasons. Controlled by a French family, Pernod is seen as lacking the balance sheet or the maneuverability to pay a premium for Beam that could match the 25 percent offered by Suntory. And it was only in 2008 that Pernod bought Sweden’s Vin & Sprit, maker of Absolut, for $8.9 billion.

Following Suntory, which will become the third-largest distiller with the deal for Beam, is Brown-Forman, a public group that owns brands including Jack Daniel’s, Southern Comfort and Woodford Reserve. With a market capitalization of about $16.7 billion, Brown-Forman also lacked the scale to pursue an acquisition of Beam. Brown-Forman is also family-controlled, giving outside shareholders limited influence.

This ranking â€" Diageo, Pernod, Suntory and Brown-Forman â€" could be the status quo for some years to come. In recent decades, most of the big global liquor brands have been absorbed by one of these groups, leaving little room for further consolidation. “Those four big player are unlikely to be purchased themselves,” said Jeremy Edwards, lead analyst at IBIS, a research firm.

Instead, the most attractive acquisition targets could be two smaller, boutique spirits groups.

Campari, a private, family controlled group, owns Skyy Vodka and Wild Turkey, in addition to its marquee brand. And Bacardi, another private group, owns Dewar’s, Grey Goose and Bombay Sapphire. Both companies could be targets for the bigger groups.

“Bacardi especially could be targeted in the future,” Mr. Edwards said. But the same issues that constrained Diageo and Pernod from pursuing Beam â€" dominant market share on the one hand, and limited flexibility on the other â€" could pose challenges to any such deal.

“The landscape is getting relatively settled,” Mr. Faucher said. “If you look at Pernod, Bacardi and Brown-Forman, there is a heavily family ownership component to each of these companies that makes further consolidation tricky. The question is, at some point do these smaller family owned companies feel the need to consolidate?”

In lieu of any more big deals, other likely targets include any brands or groups that are present in China or India, two of the fastest growing spirits markets. Diageo is in the middle of a messy attempted acquisition of India’s United Spirits, and analysts expect more international deals to come.

“I think there will definitely be further consolidation in the industry, both in the U.S. and globally,” Mr. Edwards said.

Beyond that, there is a long tail of smaller distillery groups, such as Buffalo Trace Distillers, maker of Eagle Rare bourbon and Pappy Van Winkle, which could be attractive targets for big groups looking for growth. However, given the nuances of the spirits market â€" scale does not always result in substantially higher profit margins â€" many of these distillers may be content to remain small and privately held.

“These smaller companies can be very successful on their own as long as they’ve got the core brands consumers are looking for,” Mr. Faucher said.

Suntory and Beam have both agreed to the deal, but there is still a chance a rival could spoil the party. Mr. Faucher said that Beam did not appear to fully shop itself around, given that is has a relatively low termination fee, and because the deal came together quickly. “A competing bid is unlikely, but we think speculation will continue for some time,” he said.

Michael J. Branca, an analyst at Barclays, also raised the prospect of a rival bid in a note. “Certainly, now some will wonder if other large spirits players, such as Pernod Ricard and Diageo, will become involved, following a long run of press reports of their interest in acquiring Beam,” Mr. Branca said.

But Mr. Branca also highlighted the obstacles. “The two largest spirits companies likely would have significant brand/category/country overlap with Beam - perhaps suggesting the need for a consortium bid,” he continued. “This, in and of itself, would present a far more complex scenario and, accordingly, significantly increase the risk associated with any related action - compared to a seemingly more straightforward and lower risk agreement on the table already with Suntory.”

Assuming Suntory’s deal for Beam gets done, it could be the last big liquor deal for awhile.