RealMoney Silver - An Absolut Jewel Goes Up for Grabs

An Absolut Jewel Goes Up for Grabs
By Charles L. Norton
RealMoney.com Contributor
9/24/2007 5:55 AM EDT

"Absolut prize."

That could be an advertisement for the forthcoming 80-proof battle over the coveted vodka brand and its 90-year-old Swedish owner, Vin & Sprit (V&S).

The Swedish government is in the process of selling stakes in a half-dozen or so companies, including the state-owned spirits company, which is expected to fetch $6 billion or more. It has already hired Morgan Stanley to advise on a transaction, and the likely bidders are waiting to hear more specifics next month.

At stake is Absolut, one of the world's best-selling vodkas and the No. 2 vodka brand in the U.S., the fastest-growing spirits market globally.

Besides the fact that American consumers are increasingly turning to spirits over wine or beer, there are two other important trends that underscore the allure of Absolut. First, vodka is, by far, the largest and fastest-growing spirits category, accounting for more than one-fifth of all spirits sold in the U.S. last year. There's also a "premiumization" effect in the marketplace, where higher-priced brands are growing quicker than average. Absolut, retailing for around $25 a bottle, certainly fits that bill.

Four contenders are vying to own Absolut.

Fortune Brands (FO) , maker of Jim Beam and Maker's Mark bourbons and Sauza tequila, has an advantage from the start in its close existing relationship with V&S. Fortune distributes Absolut in the U.S. through a joint venture with V&S, and V&S owns 10% of Fortune's spirits arm; any other buyer would have to unwind these relationships.

A buyout of V&S could lead to an eventual breakup of the Fortune Brands we know today, purging the home and golf business lines and creating a world-class, pure-play spirits company.

But whether Fortune has the greatest ability to truly expand the Absolut brand globally is questionable (though it claims to want to push into Russia, India and China). And should Absolut fall into someone else's hands, Fortune's spirits and wine business -- amounting to 29% of the company's sales and 44% of its operating income -- would certainly suffer. The way I see it, Fortune has the most to gain and the most to lose.

British beverages giant Diageo (DEO) is also said to be interested in Absolut, though winning Absolut would not be as critical to it. Clearly, as the world's leading premium drinks company, operating in 180 countries and territories, Diageo has the distribution might to dramatically increase Absolut's global presence.

Diageo could certainly finance the V&S price tag without a problem and would also find the greatest synergies, so it could pay more. But the No. 1 vodka in the world, Smirnoff, is one of Diageo's key brands, and many onlookers believe this could cause antitrust issues. The U.S. Federal Trade Commission considers pricing segments of the market, though; Absolut, a super-premium vodka, would thus be considered differently from the lower-priced Smirnoff.

Privately owned Bacardi, owner of super-premium Grey Goose vodka, has also expressed interest in Absolut. With no public shareholders to answer to, Bacardi could pay whatever it wants, however reckless. Remember that in 2004 the company paid a whopping $2 billion for Grey Goose when it was still a relatively small, emerging brand.

Pernod Ricard (RI) , the world's second-largest liquor company, is also joining the fray. As with Diageo, there would be ample synergies for Pernod, too. But Pernod doesn't have balance-sheet flexibility just two years after its $13 billion acquisition of Allied Domecq. Pernod would also have brand conflict with Stolichnaya, which it distributes globally.

Let the mudslinging begin. Fortune CEO Norman Wesley, who has been said to be spending quite a bit of time in Sweden lately, was recently quoted in the Financial Times as saying, "We don't have a competing vodka. If I was the Swedish government, I wouldn't want a six-month antitrust review. I would want a safe pair of hands. We provide certainty."

This battle should heat up over the coming months and is likely to extend into early 2008. Whichever way it ends up, the winner will walk away with Sweden's crown jewel and one of the best-positioned vodka brands in the world.

At time of publication, Norton was long Diageo, though positions may change at any time.

Charles L. Norton, CFA is a principal of GNI Capital, an equity long/short money management firm that provides investment management services to institutional clients including mutual fund sponsors, trust companies, investment advisory firms, corporate retirement plans and family offices. Mr. Norton is responsible for portfolio management and investment research for all of the company's managed assets, including the Vice Fund (VICEX) and the Generation Wave Growth Fund (GWGFX). Previously, Mr. Norton had been a vice president in the equity research department of a New York-based hedge fund, where he also managed separate long/short equity accounts. Prior to his experience on the buy side, he was an investment banking analyst at Smith Barney. He has a bachelor of science in management degree in finance from Tulane University's A.B. Freeman School of Business, and is a CFA charterholder. He is a member of the CFA Institute and the CFA Society of Dallas-Fort Worth. While Mr. Norton cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

Read our conflicts and disclosure policy.