Fortune Brands' debt may be too risky at current spreads as analysts point to the beverage maker as the most likely candidate to buy Absolut vodka maker Vin & Sprit, if the company is put up for sale.
Sweden's center-right government asked parliament last Friday to back the sale of three state-owned firms including Vin & Sprit, but left all options open as to when and how sell-offs will happen.
Fortune, the owner of brands such as Jim Beam bourbon and Laphroaig scotch, is considered by some analysts the most likely suitor for the company as it is already Absolut's US distributor, which would work in its favour if competition authorities scrutinised an offer for Vin & Sprit.
However, "a debt financed deal would dramatically increase their leverage and likely drop them out of investment grade," said Craig Hutson, analyst at credit research firm Gimme Credit.
Fortune would not have enough cash to finance the purchase of the company, Hutson said. From an operating standpoint the near-term outlook is also a lot more challenging than they've faced in the recent past.
Fortune, which also sells golf equipment and kitchen cabinets, said in October it expects that the softening housing environment will create challenging comparisons for its home products brands through the first half of 2007.
Hutson has moved to underweight Fortune's bonds on Thursday, saying current spreads may not account for the risk of this purchase. The cost to insure Fortune's debt with credit default swaps has tightened to 34 basis points, or $34,000 per year for five years, after jumping to 74 basis points last October on speculation the beverage maker may be targeted in a leveraged buyout. Analysts at J.P. Morgan said in a report this month that Fortune is likely to pursue Vin & Sprit.
"We believe it is highly likely Fortune Brands would be interested in bidding for Vin & Sprit given several strategic benefits it could provide," J.P. Morgan said. "An acquisition of V&S would ensure continuity in its distribution relationships in the US and internationally and enable it to maintain a full portfolio offering to the trade."
"Further, an acquisition of V&S would provide Fortune with full ownership of premium vodka, gin and rum brands which are currently missing from its portfolio," the bank said. J.P. Morgan, which has moved its recommendation on Fortune Brands to "neutral" from "overweight" on the recent spread tightening, estimates Vin & Sprit could fetch around $5.5 billion.
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