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Diageo unlikely to swoop for $10bn+ Beam Inc. in short term: City analyst

By Ben Bouckley , 10-Dec-2012
Last updated the 10-Dec-2012 at 13:30 GMT

Diageo remains tight-lipped on reports it may make a $10bn+ swoop for Beam Inc. but one analyst tells BeverageDaily.com he believes no imminent deal is likely, given the firm’s preoccupation with United Spirits and Jose Cuervo.

A Diageo spokeswoman refused to comment on a story in UK paper the Sunday Telegraph, which quotes City sources to the extent that the UK-based firm had been in talks with Japanese beverage giant Suntory in the spring and summer with a view to a multi-billion move for Beam.

The paper said it understood Diageo had also spoken with other rivals, as well as private equity players, about a possible approach for US wine and spirits giant Beam (key brands: Jim Beam, Maker’s Mark, Pinnacle, Sauza), but stated that all discussions were still at an early stage.

Foster’s wine spin-off parallels

Asked about the rumors, one City analyst (who wished to remain anonymous) told BeverageDaily.com he believed it was unlikely that any deal would happen this year.

“The rumor of talks is not surprising in itself. It’s a little bit like when Foster’s spun off its wine business over in Australia [in February 2011; SAB Miller subsequently agreed a takeover deal last September] effectively putting itself up for sale,” he said.

“I suppose you could say that the same is true of Beam to a certain extent, when it split away from Fortune Brands [last October]. Only it’s not quite worked like that; no-one’s really come in for it.”

In the shorter term, the analyst said he did not see any deal happening, given Diageo’s recent purchase of a controlling stake in United Spirits and tricky ongoing relations with Jose Cuervo.

In November Diageo agreed to buy 53% of United Spirits (India’s largest drinks company) for up to ₤1.3bn ($1.676bn).

Pernod Ricard lacks fire power?

The firm is also playing hardball with Mexican tequila brand Jose Cuervo (namely the owning Beckmann family) over renewing a global distribution deal that expires in June 2013, as it seeks a significant equity stake in one of its 14 top-selling ‘strategic brands’.

Commenting on this, the analyst said: “The reason that’s interesting is that, if they get the tequila brand, they’ll be happy with where they are in tequila. My gut feeling is that they’re not that interested in [Beam tequila brand] Sauza.

“There’s no doubt that putting Beam in there would be smart in terms of portfolio management, in terms of bourbon as the category where Diageo isn’t particularly strong, while it is everywhere else.

“But I think short term, their priority is to sort out Cuervo and United Spirits, which takes us into next year. And much as the latter is a done deal, there’s a lot to work on in terms of business integration.

Commenting on further speculation that, if it chose to move for Beam Inc., Diageo could face a fight with Pernod Ricard and Bacardi, the City analyst was circumspect.

“Bacardi is private, so there’s not much visibility, but I believe it’s in reasonable health,” he said.

“Pernod is leveraged to the extent that it’s paying down debt post the V&S acquisition, it’s still close to x4 net debt to EBITDA, which in terms of balance sheet leverage does, I think, limit what it can do.”