NEW YORK (TheStreet) -- Makers Mark bourbon, Laphroaig Scotch whiskey and Courvoisier cognac are going to have to generate consistent earnings for over a decade if Suntory's $16 billion takeover of Beam Inc. (BEAM) is going to work out for the Japanese spirits conglomerate.
Suntory's acquisition of Beam, done at a multiple in excess of 20 times Beam's trailing 12-month earnings before interest, taxes, depreciation and amortization (EBITDA), may sound a bit bubbly given that most private equity takeovers come in at a valuation of five-to-eight times EBITDA. The deal's price-to-EBITDA valuation would also make Beam among the most expensive stocks on the S&P 500 Index, up there with the likes of Starbucks (SBUX), Amazon (AMZN), Alexion Pharmaceuticals (ALXN), Forest Labs (FRX) and Vertex Pharmaceuticals (VRTX).
The obvious thing to say is that Suntory's takeover of Beam is expensive on a price-to-EBITDA basis.
WATCH: Suntory Buys Beam for $16 Billion, Gets Maker's Mark and Jim Beam
But as with pharmaceutical and tobacco firms, the tail of earnings on a solid whiskey, tequila and cognac business is extremely long. A corporate acquirer could pay 20-times EBITDA for Beam and reasonably expect to recover that price-tag, over time. Bankers call this line of thinking a company's so-called terminal value or terminal growth rate.
Most businesses are valued at some multiple of their three-to-five year earnings streams, in addition to a reasonable growth rate that can be expected into perpetuity.