Diageo favours buying brands, may bid for Absolute

DIAGEO, the world’s largest liquor maker, would rather buy drink brands than make a “transformational” acquisition, and is considering bidding for Absolut vodka, CEO Paul Walsh said. Walsh wouldn’t rule out buying Remy Cointreau SA, the maker of Mount Gay rum, which is one-tenth of Diageo’s size and whose shares have risen on speculation Diageo may bid. Absolut, made by Vin & Sprit AB, may be sold by Sweden’s government. Buying “quite large brands could be a possibility,” Walsh said in a March 27 interview at the company’s London headquarters. “It’s still an amazingly fragmented industry. It’s hard to conceive any transformational deal.” The company’s last major brand acquisition was in August 2005, when it purchased Bushmills whiskey from Pernod Ricard. Buying Absolut would give Diageo, the London-based owner of Smirnoff, the two top-selling premium vodka labels in the world. The biggest liquor takeover in the past 10 years was Pernod’s $13 billion takeover of Allied Domecq in 2005. A broader range of brands would help Diageo’s push into developing markets. The company increased its profit forecast last month after increasing sales of Johnnie Walker Scotch whisky and Smirnoff in China, Brazil and Mexico, and created an Asia-Pacific unit in January. Walsh said he will look “very closely” at Absolut. Sweden’s government hasn’t yet set a method or timetable for the sale of state assets. Stakes may be sold in initial public offerings, or by direct sales to other companies. A sale of all of Vin & Sprit may fetch 4.6 billion euros ($6 billion) in a sale, according to JPMorgan Chase & Co research, and may trigger further combinations in the industry. Pernod and Bacardi are considering buying the Swedish distiller. Vin & Sprit also makes Plymouth gin and Cruzan rums. When asked if he would consider buying Paris-based Remy, Walsh said he “looks at everything.” The French company’s market value is 2.3 billion euros. Diageo declined to comment on Remy in January, when bid speculation sent Remy’s shares surging. Remy is leaving its Maxxium joint venture in Asia to gain more control over distribution, a step analysts have said may lead Diageo to scrap its own pact with LVMH Moet Hennessy Louis Vuitton SA in the region and make a bid for Remy. “We have a fantastic relationship with Moet Hennessy,” Walsh said. “It’s hard to conceive we would do anything to disrupt that. If you believe something with Remy would disrupt that, you can draw your own conclusions.” Shares of Diageo slipped 1.5 pence, or 0.2%, to 1010.5 pence at 9.30 am in London. Remy shares added 1 cent to 50.90 euros in Paris. “He could have said ‘no, we are not interested in Remy because it would disrupt our relationship with LVMH’, but he didn’t say that — he is leaving the back door open,” said Laetitia Delaye, an analyst at Kepler Equities in Paris. “It could mean he found a way to keep both LVMH and Remy, though I don’t see how that’s possible.” Walsh, 51, took over as chief executive in 2000 from John McGrath after being chief operating officer for eight months. He headed Diageo’s Pillsbury Co baked goods unit for 10 years before that. Pillsbury was sold to General Mills Inc in 2000. Shares of Diageo added 19% last year, the fourth straight annual gain, compared with an 18% gain by Pernod stock. Diageo’s market value is about 27 billion pounds ($53 billion), more than double Pernod’s 16.2 billion euros. Diageo’s most recent purchase was a 43% stake in China’s Sichuan Chengdu Quanxing Co in a bet that rising incomes in the world’s most populous nation will boost demand. China won’t add to Diageo’s earnings for the next couple of years, Walsh said in the interview. The country is likely to have a “meaningful impact” on profit in five years if demand grows at the same pace as this year, he said. Diageo, which doesn’t break out sales by specific country, said first-half revenue excluding acquisitions advanced 16% at its “international” division, which comprises Asia, Africa and Latin America. The company plans a new distillery in Scotland to meet rising demand for Scotch in emerging markets. Like Pernod, the distiller has sought expansion outside Europe as demand for Guinness stout and premixed Smirnoff drinks slows in the region. “Europe is tough, but we do see it getting better,” Walsh said. He expects sales to return to growth in the region. Spirit brands including Johnny Walker and Bushmills Irish whiskey are “poised for growth” as Guinness demand in the British Isles shrinks, he said. Diageo paid 200 million pounds for Bushmills.

Courtesy: EconomicTimes

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