is reviewing its portfolio, including Guinness beer and a Champagne and Cognac partnership with , as CEO Debra Crew seeks to revive the UK drinks company’s growth.
The distillery is exploring a variety of possibilities, including a potential spin-off or sale of Guinness, which would likely be valued at more than $10 billion, people familiar with the matter said. The company could conduct a two-way process for the beer brand, weighing a listing while also evaluating acquisition interest if it decides to proceed, they said.
Diageo’s 34% stake in LVMH’s Moet Hennessy drinks division is also under review, the people said, asking not to be identified discussing private deliberations. No final decision has been made, and there is no certainty that the deliberations will lead to any agreement.
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Diageo shares rose as much as 6.8% on Friday afternoon in London after the Bloomberg report the review. It was the biggest intraday advance in more than four years, following a slide in shares since Crew took over a year and a half ago.
The CEO is under pressure to revive Diageo’s growth after a difficult start to her tenure. Sales fell due to falling demand in China and the US, and the owner of Johnnie Walker surprised investors with a profit warning after being blindsided by piles of unsold inventory in Mexico and Brazil.
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When Diageo reports results next month, Crew may well scrap or reduce 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 weighs a company whose portfolio ranges from Scottish single malts to a 34% stake in LVMH’s Moet Hennessy drinks division.
Diageo could seek to deepen its ownership of the joint venture or exit completely. If it wanted to sell the stake, LVMH has the obligation to buy it, albeit at a 20% discount to its fair value, according to their agreement. The division has been suffering from low demand for two years.
If Diageo seeks to take full ownership of the joint venture, it would likely require a rights offering or the sale of its beer business, said Trevor Stirling, an analyst at Bernstein. Former CEO Ivan Menezes has always stated that if Moet Hennessy were available, Diageo would be interested in buying it, he added.
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“They never acknowledged that they would be willing to sell beer — in fact, they always denied it,” Stirling said. “But I think in this case it’s something they might be willing to do.”
Diageo declined to comment on its plans, as did LVMH.
Diageo is already looking to sell Ciroc vodka, a brand once backed by music mogul Sean “Diddy” Combs, and could look to divest other smaller-scale or underperforming labels.
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Regardless of whether or not Diageo pursues a broader restructuring of its portfolio, Crew, the first woman to run the company, cannot rest easy. A former US military intelligence officer, she was named CEO a month ahead of schedule when Menezes was hospitalized and later died.
Since then, inflation and rising interest rates have taken a toll on consumers’ pocketbooks, with U.S. shoppers cutting back or opting for cheaper drinks. Retailers and wholesalers were left with more inventory than they needed.
Diageo reported a drop in annual sales last July, the first since the pandemic. But it did not adjust its medium-term guidance for annual sales growth of 5% to 7%, a target set by Menezes in 2021 when consumers with pandemic savings were spending on pricey cocktails. This is the guidance that analysts expect to be revised.
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“The things I would put on Diageo’s bill would be getting too carried away in 2021 when they really shouldn’t have,” said Roseanna Ivory, co-manager of the abdrn Global Equity Fund, which owns Diageo shares.
Veteran fund manager Terry Smith earlier this month sold his entire stake in Diageo, long considered a FTSE mainstay, citing concerns about management and the company’s growing vulnerability to weight-loss drugs, which can reduce alcohol consumption.
In the US, the surgeon general also shook up the market by saying that alcoholic beverages should carry warnings about their links to cancer.
“More and more people are giving up alcohol completely 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 being hit by a drop in demand and a corresponding hit to sales and profits. Shares of rivals such as Pernod Ricard, owner of Absolut vodka and Beefeater gin, and Cognac producer Remy Cointreau fell further as the pandemic-era boom faded.
And Diageo may be better positioned to recover than its peers. US Nielsen data shows that while spirits and beer trended lower in December, Diageo outperformed the market thanks to the strong performance of Don Julio tequila and the blackberry-flavored version of Canadian whiskey Crown Royal.
Crew has taken action in response to the surprise inventory buildup in Latin America, appointing a new head of its Mexico business. She also brought in Jhangiani, who previously oversaw finance at Coca-Cola Europacific Partners, the world’s largest Coca-Cola bottler, to replace Lavanya Chandrashekar as CFO.
However, the recovery in Latin America has been slow, with net sales in the region, which includes the Caribbean, falling 15% in the year to last June.
Weaker sales exacerbated concerns about Diageo’s debt, which rose to $21.5 billion at the end of June. Jhangiani has been touring all key regions as he familiarizes himself with a business that sold more than $20 billion worth of drinks last year. It is expected to bring greater cost discipline and a renewed focus on growth, profit and cash, Jefferies analysts wrote in a note last month.
Crew, Jhangiani and new president John Manzoni, who starts next month, will also have to gauge investor appetite for bigger solutions, including raising capital or potentially mergers and acquisitions. It remains to be seen whether investors would support a big deal.
“Debt is at the upper end of what I’m comfortable with,” said abdrn’s Ivory. “They have the strongest portfolio in the industry in a really attractive market in the US, so I think ‘staying focused’ is probably what I would prefer to see.”
When the company publishes results on February 4, investors will also expect to see continued strength in Don Julio and Guinness, as well as signs that its Scotch whiskey and vodka offerings are getting back on track. At the same time, you need to show how you will deal with your debt.
“Our very clear expectation is that debt will be reduced again,” said Lehmann, who added that the billions in loans are “eating into profits.”
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