Mergers on the agenda for Diageo

DIAGEO chief executive Paul Walsh has revealed that Scotland’s largest distiller would “participate” in merger and acquisition (M&A) activity in the Scotch sector if demand for whisky continues to rise in emerging markets.

The group – which makes blended whiskies including Bell’s, J&B and Johnnie Walker – already owns 28 malt distilleries and last week unveiled plans to build a further two plants as part of a £1 billion investment strategy over the next five years.

Diageo also unveiled plans to expand output from its existing malt distilleries by 50 per cent, while saying it still has spare capacity at its grain distillery at Cameronbridge in Fife and its joint venture with Famous Grouse maker Edrington, the North British grain distillery in Edinburgh.

Walsh said there was the “possibility” of further M&A activity within Scotland. He told Scotland on Sunday: “We’ve charted a course as a company and are very dedicated to the Scotch category.

“If there are further opportunities then we would participate as well.”

News of Diageo’s investment came just a week after arch-rival Pernod Ricard – the French drinks giant behind Chivas Brothers, the world’s second-largest Scotch maker, and brands such as Ballantine’s, Chivas Regal and The Glenlivet – unveiled a £40 million investment to boost its output by 25 per cent.

Both the giant whisky makers are ramping up production to meet the thirst for Scotch in emerging markets such as Brazil, China and India.

Whisky exports grew 23 per cent in 2011 to £4.2bn, with the Brazilian market leaping 48 per cent, and Singapore, which acts as a distribution hub for Asia, rising 44 per cent. Johnnie Walker, the world’s best-selling blend, grew sales by 15 per cent.

That demand has led Pernod Ricard to bring its Glen Keith site back into production and prompted Diageo to draw up plans for two super-distilleries, equal in size to the Roseisle plant that opened in 2010. Three sites – at Glendullan, near Dufftown, Inchgower, at Buckie, and Teaninich, near Alness – are being considered for the plants.

Diageo was created in 1997 through the merger of United Distillers-owner Guinness and Grand Metropolitan, which owned International Distillers & Vintners. The group bought Seagram’s spirits business in 2001.

Pernod Ricard bought Chivas Brothers from Seagram in 2001, adding Allied Domecq’s range in 2005.

Drinks industry insiders have long speculated that one of the remaining big deals to be done is a takeover of New York-listed Beam, which was spun out from Fortune Brands in October. Beam’s brands, such as Teacher’s whisky, were assembled as part of Pernod’s break-up of Allied Domecq in 2005.

Although many of the giant deals that created both Chivas Brothers and Diageo in their current forms took place more than a decade ago, smaller transactions have still continued to take place.

Last year Edrington sold the mothballed Tamdhu distillery to Broxburn-based Ian MacLeod Distillers, which also has Glengoyne distillery.

Billy Walker, a former operations director at Burn Stewart Distillers, bought BenRiach distillery near Elgin from Pernod Ricard in 2004 and GlenDronach in Aberdeenshire in 2008.