Fortune Brands Inc., the maker of Jim Beam bourbon and Moen faucets, is now more likely to cooperate with activist shareholder William Ackman on a plan to split up the company's three business units, people familiar with the matter said.
There isn't any guarantee that efforts to spin off or sell the golf-equipment, spirits and home-products businesses will succeed, given the complexity inherent in untangling and valuing the three divisions, the people cautioned.
Fortune also may eventually decide against working with Mr. Ackman, whose Pershing Square Capital Management owns about 11% of the company, the people said. But the people familiar with the matter described the interaction between the two sides as "constructive" rather than confrontational.
Fortune's management is open to the idea of breaking up the Deerfield, Ill., company and sees Mr. Ackman's interest as an opportunity to test the market for the different assets, one of the people familiar with the matter said. Fortune also is more optimistic that its businesses will get better value if sold amid what it views as an economic recovery, the person added.
Mr. Ackman's hedge fund disclosed its stake in the conglomerate in early October.
If the two parties are able to reach an agreement they could avoid the costs and distraction of a proxy fight. Fortune could decide to adopt a "poison pill" or shareholder rights plan but has so far decided against it because it is cooperating with Mr. Ackman, the people familiar with the matter said.
Mr. Ackman often seeks changes at companies whose shares he feels are underperforming and has been involved in several high-profile proxy fights, Last year, he made an unsuccessful bid to win five seats on the board of Target Corp. Mr. Ackman also disclosed a significant stake in J.C. Penney Co. last month, prompting the retailer to adopt takeover defenses.
Several parties could be interested in the different businesses of Fortune and some have expressed an interest already, the people familiar with the matter said. Diageo PLC and Bacardi Ltd., which compete with Fortune's spirits business, would likely take a look at the assets if they were put on the block, the people said.
The division is the largest by operating income and had $2.5 billion in 2009 annual sales.Pre-Ackman announcement, long fortune's traded about par. Now, 92-94ish. Depending on the level of cooperation and the path taken by the company, this could get interesting for bondholders.
I was involved in a similar situation with Tyco. The company under the amazing foresight of Ed Breen (can you just hear the sarcasm?) split the company into three separate pieces. Bondholders winced, screamed and howled about a sale of "all or substantially all" of the assets. I was among a group of bondholders who decided to pursue litigation. All or substantially all is difficult to define (there is no "bright line" as to what it means) and can involve years of litigation. A synopsis of the Tyco resolution can be found here: Tyco Bond Resolution
Should the company spin-out the spirits business and not put debt on it to redeem some existing debt, bondholders will get whacked. Here's the other problem if done right and the lawyers work their magic, this will not be a change of control if FO retains the bonds (successor obligor issue solved), board is intact, "all or substantially all" not an issue...
Bottom line, if you think it is a possibility that FO plays ball with Ackman - price to 4B/5B space.
Here's some levels:
6.375% due 14 ($500MM deal) +250/5yr @109 - have seen +225/5yr offered
5.375% due 16 ($950MM deal) +325/5yr @$104 - have seen +275/5yr offered
5.875% due '36 ($300MM deal)+225/30yr @$92 have seen +275 bid
Ummm, can you guess which bonds I'd be punting? See ya long guys - way too much risk for +200ish. If I HAD to hold the name or wanted to optimize my position, I would swap out of the 14s into the 16s, take out $5.
If FO pushes back, bonds could rally from here (depending on what actions they take to pacify Mr. Ackman), if not, depending on structure, they could drop further. Not exactly my risk/reward cup of tea.
Look for more info from their presentation at Morgan Stanley's retail conference.
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