Comment: Raise a glass to Walsh’s sober financial acumen
TOO often dealmaking flamboyance trumps financial discipline in winning the plaudits. Big acquisitions, particularly of big brands, suggests big business players bestriding the world. But frequently stellar moves end in tears some time after paying top-dollar.
So it is refreshing to see Paul Walsh at the Diageo helm walk away from Jose Cuervo, the top-selling tequila brand he coveted. Walsh wanted not just to continue distributing Cuervo outside Mexico beyond the contract’s end next June, but to take a stake in the product owned by the Beckmann family.
But the two parties could not agree on price. So Diageo, the world’s biggest spirits giant, has put capital discipline ahead of adding an exciting name to its panoply of premium drinks.
In doing so, Diageo risks being without a top-selling tequila after next summer. The Beckmanns probably played on this in the lengthy negotiations, but Walsh didn’t blink.
His mantra of potential acquisitions meeting strict criteria on financial returns looks to have been more than a stale corporate maxim.
He also might think that a decent fallback position is to seek a deal with US group Beam, probably in conjunction with Suntory of Japan. The possibility would be for the British group to snap up Sauza, Beam’s tequila brand which is the second-biggest seller in the category.
But even if that alternative deal does not come off, either, the damage to Diageo would be limited. Tequila only accounts for 3 per cent of Diageo’s revenues and 2 per cent of profits.
Most of Diageo’s Cuervo sales are in the United States, too, so there will be limited impact on its other geographical divisions.
And the ending of such a relationship does nothing to impede Walsh’s keystone strategy of organically plugging into what could now be called the “Bric-A” emerging markets - Brazil, Russia, India and China – with added Africa, the increasingly influential new kid on the block for western drinks companies.
The swiftly growing aspirational middle classes in those markets have a thirst for the cachet associated with premium western whiskies, vodkas, cognacs, etc as much as the actual taste.
Consolidation possibilities come and go. Those underlying industry dynamics have greater long-term traction for earnings.
And, as a bonus, Diageo has shown the industry it has financial red lines and won’t cross them out of brand-hungry hubris.
Perfect timing for bank bonus-setting season
IT IS an unwanted record to be associated with. At $1.9 billion (£1.2bn), the fine imposed by the US department of justice on HSBC for failing to stop criminal and terrorist money-laundering is the highest ever financial penalty for a bank.
The dodgy cash ranged from Mexico to Iran and Syria. No wonder HSBC boss Stuart Gulliver said yesterday: “We have said we are profoundly sorry for them [the compliance mistakes], and we do so again.”
It follows the $327 million fine levied on Monday on Standard Chartered for violating US sanctions against the likes of Iran and Burma.
And we should find out pretty shortly how much Royal Bank of Scotland will be hit for as a result of the ongoing probe into the fixing of the London Interbank Offered Rate (Libor).
All in splendid time for the onset of the bank bonus-setting season.
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Saturday 25 May 2013
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