Diageo at the centre of takeover fantasies
Mr Ackman revealed in October 2010 that his fund Pershing Square Capital owns an 11 percent stake in Fortune Brands.
Fortune Brand’s three main divisions – spirits, golf equipment and home appliances – don’t hang together naturally. There are potentially better, more motivated owners for them. But drinks account for some two-thirds of Fortune Brands’ profits, so it deserves the primary focus.
The group – which also sells Hornitos tequila, Courvoisier cognac and Canadian Club whisky – is expected to generate EBITDA of USD 635 million this year. At 15 times EBITDA Diageo’s price tag could come to about USD 9.5 billion (EUR 6.9 billion).
Of course, Diageo would have to stretch itself considerably to pay a top-shelf price for a portfolio that also includes some less attractive brands. However, a handful of smaller, independent firms like Gruppo Campari have shown an interest in what insiders call “tail brands.” That would allow Diageo to finance part of a deal with divestitures.
It’s too soon to say whether Mr Ackman really wants to carve up Fortune Brands, or if other shareholders would back this plan. But with a buyer waiting in the wings the odds are not bad.
At the moment Diageo is the bankers’ darling because a deal in the luxury goods sector has sparked further takeover possibilities.
At the end of October 2010, French luxury group LVMH (Louis Vuitton Moet Hennessy) bought shares in sector peer Hermès which allowed LVMH to top up its stake to 17.1 percent.
LVMH’s boss and major shareholder Mr Arnault said he was not planning a full takeover bid for Hermès, the maker of expensive silk scarves and handbags, and denied that LVMH could sell its stake in Moet Hennessy.
However, the acquisition has led to renewed speculation among bankers that in order to finance a full bid for Hermès, whose market capitalisation is EUR 18.6 billion, a sale of LVMH’s controlling stake in Moet Hennessy is possible, and Diageo would almost certainly be in the queue to buy it.
As said, such a deal would depend on Mr Arnault changing his mind about a sale of Moet Hennessy. The truth is he is not known for dithering over strategy.
Never mind that the Moet Hennessy sale will probably never materialise. This will not stop bankers drooling with saliva over the sky-high price Moet Hennessy could fetch.
Diageo already owns 34 percent of Moet Hennessy. Analysts value Moet Hennessy at 20 times its historic 2009 EBITDA of EUR 852 million, putting a price of EUR 17 billion on the cognac and champagne business. This means that Diageo would have to pay EUR 11.2 billion for the remaining 66 percent.
The figures are enough to make your head spin. This valuation is above the average of around 15 times EBITDA over the last decade in the spirits industry – above the 15 times EBITDA Diageo and Pernod Ricard paid for Allied Domecq in 2005 but below the 25 times EBITDA Bacardi paid for Grey Goose vodka in 2004 – and close to the most recent big deal in which Pernod Ricard paid 20.8 times for Swedish Absolut vodka group Vin&Sprit.
Added up on the back of a napkin Diageo could be forced to dish out EUR 11 billion for Moet Hennessy and EUR 6.9 billion for Fortune’s drinks. How Diageo could fund EUR 18 billion is beyond us. But don’t accuse the bankers of lacking in imagination.
As the bankers say: all or any of those brands would sit nicely among Diageo’s portfolio of globally-renowned brands such as Smirnoff, Johnnie Walker and Guinness.
