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Fortune Brands (FO) is providing us a great opportunity to participate in a spin-off that will separate the spirits and home & security business. These types of plays are great for investors; they help unlock value that is often unrealized as a combined company. By spinning off the fast-growing business, the market may assign a higher valuation to the separated companies. This will then allow the investor to realize the full potential of the investment.

Fortune Brands will be divided into two companies. Beam will be solely focused on spirits and Fortune Brands Home & Security will focus on home products. The spin-off is tax free and is expected to take place early fourth quarter, 2011.

Here are some highlights about Fortune Brands:

  • Net sales for the business were up $1.59 billion, which was a 5% increase from the same quarter in the previous year. These numbers already exclude the Acushnet Golf business that was recently sold to a group led by Fila for $1.22 billion. Beam, the spirits division, saw net sales increase 13%.
  • Beam has grown the business by focusing on innovation and creating strong brands. Over the past 2 years Beam has revolutionized the category by bringing innovations like Red Stag and Jim Beams Devil's Cut to market. I look for that growth to continue as Beam plans to expand offerings to the international market.
  • Beam has done a great job enhancing the value of acquisitions. One such example was when Beam acquired Skinnygirl's cocktail brand. Beam increased value by utilizing its sales and points of distribution. Beam has boosted availability of the brand by 70% and Skinnygirl has become the fastest growing spirit brand in America.
  • Beam has gotten closer to its market by taking control of distribution. Beam's sales organization now accounts for 75% of global sales, compared with 8% three years ago. Having control of the distribution allows Beam to bring strong relevant brands to market, as well as to correctly leverage distribution partners.
  • Home & Security is expanding offerings by targeting new markets. Moen is currently expanding product offerings in the commercial space. Moen is also expanding into the international market and is currently the #3 imported facet brand in China.
  • Home & Security is keeping a tight handle on cost. It recently restructured the supply chain, which cut 40% of its manufacturing footprint. This allowed the company to capture profitable market share.

I'm bullish on Fortune Brands and think the spin-off will unlock some great opportunity. For those investors that do not want to keep the Home & Security company, you may sell it after the spin-off and hold the faster-growing spirits company. I'm expecting a nice rally after the spin-off as I expect a lot of investors to invest in a new fast-growing spirits pure play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Fortune Brands: Value Is About To Be Unleashed