Diageo ready to spend billions in battle for new markets

Published on Thursday 10 February 2011 14:29

SPIRITS giant Diageo revealed yesterday it had a warchest of "many billions of pounds" for potential takeovers, as it also warned of costcutting in bombed-out markets such as Ireland, Greece, and Spain.

It came as Scotland's largest whisky group missed City forecasts with a 9 per cent rise in half-year earnings partly due to depressed consumer appetite in those countries and Portugal. Diageo's shares closed down 4.6 per cent at 1,195p.

Paul Walsh, group chief executive, unveiling a 2 per cent rise in underlying operating profits to 1.7 billion against 1.6bn last time, said: "The global economic recovery is uneven and Europe is weaker."

He added that consumer confidence in Greece and Spain were at "all-time lows" due to the financial crisis. Net sales across Greece, Iberia and Ireland were down 13 per cent.

Walsh said Diageo would have to cut marketing spending in those countries as a result, and could also trim the bricks and mortar cost base of those operations "which could include jobs".

By contrast, the company did much better in emerging markets such as Africa, Asia and Latin America, partly helped by strong sales of Johnnie Walker whisky, and would look for bolt-on acquisitions in those regions.

Walsh also said Diageo would be alert to the availability of more "transformational" brands, with another 775 million of free cash flow in its first trading half to end-December.

Asked what funds Diageo had available for such acquisitive action, Walsh said "it runs into billions". He would not be drawn on specific targets but said "we would look at everything". There has been speculation the group could be interested when American giant Fortune Brands demerges its drinks business by the end of this year.

Carl Short, drinks analyst at Standard & Poor's equity research, said: "Fortune has Jim Beam, and Diageo doesn't have a big presence currently in bourbon." Analysts believe if Diageo did make an acquisitive strike on Fortune's drinks arm it would have to move in conjunction with another big player, such as Bacardi.

Diageo posted earnings of 48.2p a share, missing a City consensus forecast of 50.6p. Amid the unfolding austerity programme, its net sales in Britain edged up 1 per cent, with wine the main driver.

There was some rebound in the US but it was a much stronger picture in emerging markets, with net sales in Asia Pacific up 7 per cent and up 13 per cent in the "international division", which includes Latin America, the Caribbean and Africa.

Walsh said Johnnie Walker's sales grew 10 per cent overall, but by 20 per cent in emerging markets - the latter now accounting for well over 30 per cent of Diageo's group sales.

Diageo's interim dividend rises 6 per cent from 14.6p to 15.5p.City analysts said likely profit growth for the full year was 2 to 3 per cent compared with previous expectations of about 4 per cent

The company has only said it expects profit growth of more than the 2 per cent registered last year.