Diageo climbs amid US deal hopes
Shares advance on speculation that the Guinness maker is planning a tie-up with Budweiser brewer Anheuser-Busch.
"DGUSA planning meetings have been postponed, incentive trips cancelled, training postponed indefinitely and the word on the street is that Diageo has called a meeting/conference call in April,” the magazine reported.
Analysts speculated that Diageo could be close to agreeing a licence with Anheuser-Busch to distribute the UK group's Guinness and ready to drink brands (RTD) in North America. Diageo already has a similar arrangement in place with Anheuser to distribute its Budweiser brand in Ireland.
"A Guinness licence in North America is plausible," said Citi analyst Philip Morrisey. "Historically, there have been discussions about Anheuser distributing Diageo’s beer and RTD brands in the US, the stumbling block being Diageo’s reluctance to cede control and EBIT, distribution of these brands being in an entirely separate organisation from its US wine and spirits brands.
"A tie-up now could prove timely since although the Guinness brand continues to grow net sales, momentum is slowing while RTD sales are now declining."
The US beer and RTD categories represent about 15% of Diageo's US net sales and circa 5% of group. Globally, Guinness sales grew 5% in Diageo's fiscal first half ending December 2007, compared with 9% in the full year 2006 and 7% in 2007. Meanwhile, revenue from RTDs such as Smirnoff Ice and Archers Aqua fell 9% in the first half.
Licencing the Guinness and RTD brands to Anheuser in North America would provide cost savings and stronger distribution for the UK company, as well as giving Anheuser complementary brands - albeit with some overlap between its Bacardi RTDs and Diageo's spirits portfolio.
Morrisey said that similar deals usually yield cost savings equivalent to 5%-10% of net sales. These would amount to circa £20-40m, or up to 2% of Diageo’s fiscal 2008 earnings.
But he did not believe Anheuser would be the ideal partner to meet Diageo's stated objective of becoming a "total beverage alcohol" company. Anheuser is too US-centric and competes with Diageo's spirits business, plus there would be limited synergies to be gained from the former's limited international presence spirits and the latter's twin distribution networks, Morrisey argued.
"While investors would likely welcome such a move, especially if US spirits trends deteriorate over coming months, the financial implications for Diageo would be limited. From an Anheuser perspective a deal could be a natural extension of the sales and marketing agreements with InBev while not impeding a potential large-scale alliance between these two," the Citi analyst concluded, repeating "hold" advice on Diageo shares.
