In 2009, things were looking rough for the cyclical business segments of Fortune Brands (FO); year over year sales in the Home & Security segment declined 20%, along with an 11% drop in Golf segment revenues. In 2010, (while keeping in mind the relatively weak base of YOY double digit declines) things started moving back in the right direction with an overall increase in company sales of 6.7% and a 51.2% jump in operating income. Despite these results, there were two announcements that truly stood out in 2010: on December 8th, the company announced that they would split their three (Spirits, Home & Security, and Golf) business units (while retaining the Beam Global Distilled Spirits business). The reason for this move (and the first big announcement) was a stake by activist shareholder Bill Ackman, who picked up 16.68 million shares of FO (more than 10% of shares outstanding) in the six months prior to the decision at an estimated cost of roughly $700-800 million. Management “saw the light” for releasing cooped up shareholder value and agreed with his suggestions. Today, his shares are worth more than $1 billion; can’t complain with a 25% return over a 3 month period.
As for the CEO, he made off quite nicely as well. According to the 14A filed on March 7th, Bruce Carbonari received roughly $24 million in total compensation over the past two years as the face of Fortune Brands. While it was slightly lower YOY (12%), it was nearly 29% higher than 2008 ($8.7 million). On top of that, he has beneficial ownership of more than 1 million shares, which have tripled in value from the March 2009 low of $19.07/share.
While his payoff is largely based on the overall success of Fortune Brands and the returns to shareholders, it is interesting to step back and look at the whole picture. Leading up to the 2009 low, management had little/no control of the results; regardless of their actions, the cyclical businesses (Home & Security, Golf) were going to suffer. On the other hand, the same can be said on the upside; the results have been strong, but nothing to really blow you out of the water in either of those two divisions. The biggest change, which is consistent throughout corporate America, was cost control of the small incremental increase in sales. On the bottom line, we can see that comparison results were negatively affected in 2009 by nearly $80 million in restructuring charges and roughly $60 million on currency; when you start to strip out items like these, it makes the YOY results come back down to earth.
On top of that, the planned split was brought in by an outside activist, and the increase in stock price has largely been driven by Mr. Ackman’s share accumulation; Mr. Carbonari was essentially paid a couple million dollars to agree. It really isn’t that big of a deal; just find it interesting how a compensation committee can justify an average of $12 million in compensation over two years (roughly 33% higher than the previous time period) while a company struggles during a recession (not really their fault) and then recovers with the economy and from activist recommendations (again, not really their own doings). While the triple since March 2009 is impressive, it’s important to put things in perspective; the stock broke through $50/share in 2002, and really hasn’t done anything since. Norman Wesley, who was CEO before Mr. Carbonari, stepped down in 2008 before things turned south; at the end of the day, he was handsomely paid (roughly $9 million annually) for the climb (stock doubled during his 9 year tenure, all of which was gone within 12 months) , and Mr. Carbonari was compensated for the recovery/spin-offs.
As often happens in corporate America, no one ends up paying for the decline besides shareholders. While operations were clearly affected by the recession, they were also pumped up by the boom years leading up to the fall. There needs to be change with this idea that top management, which has their hand on the pulse of the industry, should be rewarded for their decision making during the good times yet be protected by the economic strife during the tough times. They are paid millions to be proactive and to make the tough decisions, and should only be compensated for doing so.
It will be interesting to see the end results of the separation of the three business segments: Home & Security (which will be spun off as an independent publicly traded company), Golf (sale is being overseen by Morgan Stanley), and Spirits (sale is being overseen by Barclays and Credit Suisse). The changes in the premium spirits business, where Fortune is #2 in the United States and #4 in the World, will be dependent upon any agreements between Fortune and Diageo (DEO) or Pernod, which are still question marks (both firms have hired advisers).
In the end, investors like Bill Ackman and managers like Bruce Carbonari have been paid off handsomely in the Fortune Brands split. On top of that, expect another big pay day for Mr. Carbonari in 2011 for additional work on the deals, and a nice slice for the investment banks advising and completing these transactions; future investors looking at FO would be wise to do their due diligence when thinking about where they fit into this equation looking forward.
As for the CEO, he made off quite nicely as well. According to the 14A filed on March 7th, Bruce Carbonari received roughly $24 million in total compensation over the past two years as the face of Fortune Brands. While it was slightly lower YOY (12%), it was nearly 29% higher than 2008 ($8.7 million). On top of that, he has beneficial ownership of more than 1 million shares, which have tripled in value from the March 2009 low of $19.07/share.
While his payoff is largely based on the overall success of Fortune Brands and the returns to shareholders, it is interesting to step back and look at the whole picture. Leading up to the 2009 low, management had little/no control of the results; regardless of their actions, the cyclical businesses (Home & Security, Golf) were going to suffer. On the other hand, the same can be said on the upside; the results have been strong, but nothing to really blow you out of the water in either of those two divisions. The biggest change, which is consistent throughout corporate America, was cost control of the small incremental increase in sales. On the bottom line, we can see that comparison results were negatively affected in 2009 by nearly $80 million in restructuring charges and roughly $60 million on currency; when you start to strip out items like these, it makes the YOY results come back down to earth.
On top of that, the planned split was brought in by an outside activist, and the increase in stock price has largely been driven by Mr. Ackman’s share accumulation; Mr. Carbonari was essentially paid a couple million dollars to agree. It really isn’t that big of a deal; just find it interesting how a compensation committee can justify an average of $12 million in compensation over two years (roughly 33% higher than the previous time period) while a company struggles during a recession (not really their fault) and then recovers with the economy and from activist recommendations (again, not really their own doings). While the triple since March 2009 is impressive, it’s important to put things in perspective; the stock broke through $50/share in 2002, and really hasn’t done anything since. Norman Wesley, who was CEO before Mr. Carbonari, stepped down in 2008 before things turned south; at the end of the day, he was handsomely paid (roughly $9 million annually) for the climb (stock doubled during his 9 year tenure, all of which was gone within 12 months) , and Mr. Carbonari was compensated for the recovery/spin-offs.
As often happens in corporate America, no one ends up paying for the decline besides shareholders. While operations were clearly affected by the recession, they were also pumped up by the boom years leading up to the fall. There needs to be change with this idea that top management, which has their hand on the pulse of the industry, should be rewarded for their decision making during the good times yet be protected by the economic strife during the tough times. They are paid millions to be proactive and to make the tough decisions, and should only be compensated for doing so.
It will be interesting to see the end results of the separation of the three business segments: Home & Security (which will be spun off as an independent publicly traded company), Golf (sale is being overseen by Morgan Stanley), and Spirits (sale is being overseen by Barclays and Credit Suisse). The changes in the premium spirits business, where Fortune is #2 in the United States and #4 in the World, will be dependent upon any agreements between Fortune and Diageo (DEO) or Pernod, which are still question marks (both firms have hired advisers).
In the end, investors like Bill Ackman and managers like Bruce Carbonari have been paid off handsomely in the Fortune Brands split. On top of that, expect another big pay day for Mr. Carbonari in 2011 for additional work on the deals, and a nice slice for the investment banks advising and completing these transactions; future investors looking at FO would be wise to do their due diligence when thinking about where they fit into this equation looking forward.
