Diageo hoards cash to acquire top brands

Published on Wednesday 2 February 2011 15:37

DIAGEO, the world's biggest spirits company, is likely to disappoint investors this week by putting share buybacks on ice as it hoards a war chest for potential blue-chip brand acquisitions.

Group chief executive Paul Walsh flagged up the possibility of further stock buybacks at the group's annual results last August, when he revealed it had increased its free cash flow by 800 million to 2 billion. But it is thought he now wants capital available to splash out on top brands in 2011.

American consumer goods maker Fortune Brands, which reported strong fourth-quarter trading results on Friday, said it was on track to spin off its home goods business and demerge or sell its golf unit in order to focus on its high-return spirits business.

But speculation has risen that Diageo and Bacardi may try and gatecrash the restructuring with a joint offer for the drinks business, whose flagship brands include Jim Beam bourbon and Sauza tequila.

In addition, private equity giant TPG may sell Turkish drinks business Meyichi, one of whose flagship brands is raki, an aniseed-based spirit similar to the Greek ouzo or French pastis. Analysts say Diageo would be keen on capturing a strong Turkish presence via such an acquisition.

One industry source said ahead of Diageo's interim results this Thursday: "I think you can say stock buybacks at Diageo will definitely be put on hold. There are quite a few assets that could be up for sale in parts of the world Diageo is very interested in. North America is nearly 40 per cent of the group's earnings, so what happens to Fortune Brands must be very interesting to the company."

Diageo, Scotland's biggest whisky producer with 3,500 employees north of the Border, snapped up Bushmills whiskey in 2005 as a spin-off from Pernod's acquisition of Allied Domecq, Scotland's second-biggest whisky maker.

It has done nearly 12bn of share buybacks in addition to a progressive dividend policy since being formed through the merger of Guinness and Grand Met in 2008.

Meanwhile, it is understood Walsh has all but given up hope of buying the French luxury goods group LVMH's 66 per cent stake in the Moet Hennessy champagne-to-cognac business. Diageo owns the other 34 per cent, and there was speculation LVMH might sell out in order to mount a full takeover bid for luxury peer Hermes. But one source said: "LVMH does not want to sell even though Diageo would buy the Hennessy stake tomorrow."

Last year Diageo's profits rose 2 per cent to 2.75bn, with a patchy performance in the UK, Europe and America offset by better trading in Asia, Africa and Latin America. One analyst said: "I think we will see more of the same this week, although there may be some better news from America where there seems to have been a pick-up in the spirits market in the second half."