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Summary

  • Shareholder approval and EU clearance make the Beam merger likely to be complete at the end of April.
  • Interested investors will want to lever to increase returns given the small merger spread.
  • Risk averse investors may want to stay away given the risk that customary closing conditions may not go as planned.

Beam Inc. (BEAM) is a premium spirits company that makes and sells branded distilled spirits products in North America, South America, Europe, Middle East, Africa, and Asia-Pacific. Primary products include bourbon whiskey, tequila, Scotch whisky, Canadian whisky, vodka, cognac, and rum. It's top brands include Jim Beam Bourbon, Maker's Mark Bourbon, Sauza Tequila, Courvoisier Cognac, Canadian Club Whisky, Teacher's Scotch, and Pinnacle Vodka.

Beam merger background

On January 12, 2014, Beam entered into a merger plan with Suntory Holdings Limited and SUS Merger Sub Limited. The acquisition price of Beam was negotiated at $83.50 per share in cash. Subject to the terms of the merger agreement, Sub Limited will be merged into Beam, with Beam surviving the merger as a subsidiary of Suntory Holdings.

Expected return of Beam

Returns to investors in merger situations depend on 3 things:

1. Probability that the merger is completed

2. The time it takes for merger to be completed

3. The difference between current market price and price received when completed

Between the time the merger is announced and completed, the stock price is often lower than what will be paid if completed. In the case of Beam, it currently trades at $83.34, which is $0.16 less than what will be paid to shareholders if the merger goes as planned. This $0.16 is called the "spread".

If the merger would complete tomorrow, at the current market price of $83.34, the daily return would be .19 percentage points($0.16/$83.50). The problem is that the merger may take awhile to complete. A .19 percentage point return is a great daily return, but not so much for longer holding periods. The problem is that the merger may take awhile to complete.

If the merger does not finalize, the stock will likely depreciate back down to its $67 pre-merger price. This would cause a loss of approximately 25%. The good news is that on March 25th 2014 Beam received shareholder approval for the merger. The SEC Filing ex-99.1 submitted March 27, 2014 stated that Beam expects the merger to be completed in the week of April 28th. With the European Union approval on April 7th 2014, the probability has become very likely. A reasonable merger success range is between 95% and 100%.

In the chart below shows my subjective "Most Like Scenario". In this scenario, the merger is expected to complete on Wednesday April 30th, which is 24 days from the time of this writing. The probability that the merger will go through is estimated to be 98.5%. Expected Value (EV) is calculated as the probability of success times (Spread/Price paid). EV can be annualized by multiplying by (365/expected days until completion)

Most Likely Scenario
Days to completionProbability of completionEVAnnualized EV
2498.50%0.19%

2.88%

Below is a similar analysis, but shows the Annualized EV if a 90% completion is assumed and the merger takes longer than expected.

90% Chance of Success
DaysAnnualized EV
302.10%
601.05%
900.70%
1200.53%
1500.42%
1800.35%
2100.30%
2400.26%
2700.23%
3000.21%
3300.19%
3600.18%

With the 1-year Treasury yield at approximately .13%, risk-takers with extra liquidity may want to invest in Beam up until the merger completion date.

Source: Beam Merger Jumping Final Hurdles Provides Long Opportunity