BOSTON, Jan 13 (Reuters) - Like a fine bourbon, a good bet sometimes needs to age.
Hedge fund billionaire William Ackman saw his 3-1/2 year old investment in Fortune Brands pay off big on Monday when Japanese whiskey producer Suntory said it would pay $13.6 billion cash for Beam, the liquor unit spun out of Fortune in 2011.
The deal, if it goes through, will give Ackman and his investors something to drink to in early 2014, after his 2013 was overshadowed by a $500 million loss on J.C. Penney and mounting losses on his short against Herbalife.
But it also shows Ackman’s long-term investment savvy by proving right his years-old theory about Fortune Brands: the conglomerate owner of Titleist golf balls, Jim Beam and Moen faucets was far more valuable to investors broken up than unified.
Fortune Brands was worth about $7 billion in 2010 before it was split up under pressure from Ackman - less than half the agreed selling price for Beam alone.
“What (Ackman) needs is a winner to help erase the memories of J.C. Penney,” said one investor in Ackman’s fund who is not permitted to discuss his investments publicly. “He has been able to come back before with winners like General Growth Properties and Canadian Pacific,” referring to other bets that have proven winners over the course of years.
With news of the proposed Suntory deal driving up Beam’s stock price 24 percent on Monday, Ackman’s Pershing Square Capital Management stands to earn $370 million on the investment in one day. Pershing Square is Beam’s biggest owner with a stake of 12.8 percent, and Beam makes up roughly 15 percent of Pershing Square’s total portfolio.
Ackman put Fortune Brands into his $12 billion portfolio in 2010 - the same year he added J.C. Penney - and immediately began arguing for the company’s breakup into three parts.
By spring of the next year, Fortune had agreed to sell off its Titleist operation to South Korean firm Fila for $1.2 billion and by autumn, Fortune split the remaining businesses into two separately listed companies: Beam and Fortune Brands Home Security. At that point, Ackman owned 20.8 million shares in each.
One thing Ackman always says about himself is that he can wait for a long time for his thesis to play out. He profiled Fortune Brands Home Security as one of his best picks at an industry conference in October 2011 and argued the recovering housing industry could double the stock price to as high as $27.
He didn’t wait that long, though. Regulatory filings show that he sold out of Fortune Brands Home Security in early 2012 when the stock was near $22, netting him a profit of roughly $500 million. Had he held on longer, the return would have been far bigger as the stock now trades at $46.71. The company’s publicly traded value is $7.7 billion - also higher on its own than the unified Fortune Brands in 2010.
But in the bet on Beam, where Ackman still owns 20.8 million shares, he’s been more patient. The stock has climbed steadily through the years, up 72 percent since he bought in.
Ackman declined to comment for this story, but said last year that Beam was one of the driving forces in his portfolio - along with Canadian Pacific Rail - in 2013, helping it stay in the black despite the J.C. Penney losses.
Pershing Square L.P. fund ended the year with a 9.7 percent gain ahead of the industry’s average 9.3 percent return, but lagging the double-digit returns of rivals like David Einhorn and Daniel Loeb.
The deal involving Beam also helped other big investors, including mutual funds like Vanguard and Fidelity Investments, and Mario Gabelli’s GAMCO Investors.
Gabelli tweeted “Suntory ‘you made my day! ... thanks.'” He also noted that Ackman was instrumental in creating Beam. Gabelli added in another tweet “And thanks ----Bill.”
It is not the first time that Ackman, an activist investor, has been near the center of a mega-deal. Two years ago he played a prominent role in taking Burger King public again, having co-founded Justice Holdings which took a 29 percent stake in the fast food business. He also had a stake in 3G Capital Management the buyout shop which took the burger chain private in 2010.