Drinks giant Diageo is considering whether to sell off Guinness as it plots a review of its overall drinks business.
The company, which was formed by the merger of Guinness with Grand Metropolitan in 1997, is studying a potential sale or spin off of the historic stout, which would likely be valued at about $10 billion (€9.5 billion), according to people familiar with the matter.
The company could run a dual-track process, weighing a listing while also gauging takeover interest, if it decides to proceed, the people said.
Diageo’s company’s share price has fallen 27 per cent since Debra Crew took over as chief executive a year and half ago, and the group’s sales have dropped on cooling demand in China and the United States. As well as that, the owner of Guinness and Johnnie Walker surprised investors with a profit warning just months into her tenure after getting caught out by piles of unsold inventory in Mexico and Brazil.
When Diageo reports earnings next month, Ms Crew could well scrap or lower Diageo’s growth targets to reset expectations to a more realistic level, investors and analysts said. Others say bigger changes are needed as new chief financial officer Nik Jhangiani runs the rule over a company whose portfolio ranges from Scottish single malts to a minority stake in luxury-goods conglomerate LVMH’s champagne and cognac business.
As well as possibly offloading Guinness, Diageo is already looking to sell Ciroc vodka, a brand once backed by music mogul Sean “Diddy” Combs, and could look to dispose of other subscale or underperforming labels.
Diageo’s 34 per cent in Moet Hennessy is also under review, the people said, asking not to be identified discussing private deliberations. Diageo could look to deepen its ownership in the venture, or exit altogether. If it wanted to sell the stake, LVMH has an obligation to buy it, albeit at a 20 per cent discount to its fair value, according to their agreement. The division has been suffering from poor demand for two years.
Should Diageo seek to take full ownership of the joint venture, it would likely require a rights offer or the sale of its beer business, said Trevor Stirling, an analyst at Bernstein. Former chief executive Ivan Menezes had always maintained that if Moet Hennessy became available, Diageo would be interested in buying it, he added.
“They’ve never acknowledged that they’d be willing to sell beer – in fact they’ve always denied it,” Mr Stirling said. “But I think in this case it’s something they might be willing to do.”
No final decisions have been made, and there’s no certainty the deliberations will lead to any deals.
Diageo declined to comment on its plans, as did LVMH.
Regardless of whether Diageo looks to shake up its portfolio, Ms Crew, the first woman to run the company, cannot be sitting easy. A former US military intelligence officer, she was appointed chief executive a month early when Mr Menezes was hospitalised and later died.
Since then, inflation and rising interest rates have been biting into consumers’ wallets, with shoppers in the US cutting back or trading down to cheaper spirits. Retailers and wholesalers have been left with more stock than they needed.
Diageo reported a decline in annual sales last July, the first since the pandemic. But it did not adjust its midterm guidance for annual sales growth of 5 per cent to 7 per cent, a goal set by Mr Menezes in 2021, when consumers with pandemic savings were splurging on expensive cocktails. This is the guidance analysts expect will be revised.
“The things that I would lay at Diageo’s door would be getting over-excited in 2021, when they really shouldn’t have done,” said Roseanna Ivory, co-manager of the ABRDN Global Equity Fund, which holds Diageo shares.
Veteran fund manager Terry Smith earlier this month dumped his entire stake in Diageo, long considered a stalwart of the FTSE, citing concerns about management and the company’s growing vulnerability to weight-loss drugs, which can curb alcohol consumption.
In the US, the surgeon general also roiled the market when he said alcoholic drinks should carry warnings of their links to cancer.
“More and more people are giving up alcohol altogether or at least want to reduce their consumption,” said Kai Lehmann, senior research analyst at Flossbach von Storch, a Diageo investor.
Diageo is not alone among distillers in getting hit by a slump in demand, and by a corresponding blow to sales and profit. The shares of rivals such as Pernod Ricard, owner of Jameson whiskey, Absolut vodka and Beefeater gin, and cognac producer Remy Cointreau have fallen even further as the pandemic-era boom fizzled out.
And Diageo might be better placed to bounce back than peers. Nielsen figures in the US show that while spirits and beers trended weaker in December, Diageo outperformed the market thanks to the strong performance of Don Julio tequila and the blackberry-flavoured version of Crown Royal Canadian whisky.
Ms Crew took steps in response to the surprise inventory build-up in Latin America, naming a new head of its Mexico business. She also brought in Mr Jhangiani, who formerly oversaw finances at Coca-Cola Europacific Partners, the world’s biggest Coke bottler, to replace Lavanya Chandrashekar as chief financial officer.
However, recovery in Latin America has been slow, with net sales in the region which includes the Caribbean down 15 per cent in the year to last June.
Weaker sales have exacerbated concerns about Diageo’s debt pile, which swelled to $21.5 billion at the end of June. Mr Jhangiani has been on a tour of all the key regions as he gets a grip on a business that sold more than $20 billion worth of booze last year. He is expected to bring greater discipline on costs and a renewed focus on growth, profit and cash, analysts at Jefferies wrote in a note last month.
Ms Crew, Mr Jhangiani and incoming chairman John Manzoni, who starts next month, will also have to gauge investor appetite for bigger solutions, including capital raising or potentially M&A. Whether investors would support a major deal remains a question.
“Leverage is at the higher end of what I’m comfortable with,” said ABRDN’s Ms Ivory. “They have the strongest portfolio in the industry in a really attractive market in the US, so I think ‘stick to their knitting’ is probably what I would prefer to see.”
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When the company publishes results on February 4th, investors are also hoping to see continued strength in Don Julio and Guinness, as well as signs that its scotch and vodka offerings are getting back on track. At the same time, it needs to show how it will tackle its debt pile.
“Our very clear expectation is that debt will be reduced again,” said Mr Lehmann, who added the billions of borrowings were “eating away profits”. – Bloomberg
