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Post date: 06/08/2015 - 15:20

Diageo takeover unlikely as 3G rumours swirl

Is Diageo about to be taken over by a heavyweight Brazilian investment fund? That's the big question after a Brazilian magazine reported on Friday that 3G Capital was sizing up a bid.

3G was founded by billionaire Jorge Paulo Lemann and owns one-fifth of Anheuser-Busch InBev, so the experience is in place. Furthermore, Diageo's New York share price on Friday saw its biggest jump since 2008, meaning that some people clearly think a deal is on the cards - or at least, as is the way with the hyper-sensitive stock market, some people believe that other people will think a big deal is on the cards...

Is Diageo about to be taken over by a heavyweight Brazilian investment fund? That's the big question after a Brazilian magazine reported on Friday that 3G Capital was sizing up a bid.

3G was founded by billionaire Jorge Paulo Lemann and owns one-fifth of Anheuser-Busch InBev, so the experience is in place. Furthermore, Diageo's New York share price on Friday saw its biggest jump since 2008, meaning that some people clearly think a deal is on the cards - or at least, as is the way with the hyper-sensitive stock market, some people believe that other people will think a big deal is on the cards...

But before Guinness, Johnnie Walker and Smirnoff are packed up and sent down the Amazon along with Diageo's multitude of other brands, it is worth noting that analysts today lined up to offer a resounding "not likely" to the speculation.

Bernstein said they would be "very surprised" if 3G - and by extension, A-B InBev - acquired Diageo, not least because 3G is still bedding in Heinz with Kraft Foods are their merger in March (3G is an owner of Heinz).

Bernstein also said the report that the past few days' speculation is based on is "possibly erroneous". It came from Brazilian news magazine Veja, which in November suggested that 3G was lining up a bid for the Coca-Cola Co as it prepared to set up a new fund to invest in the food and beverage sector.

Coca-Cola, as yet, remains untouched.

The report is also based on an unnamed source. And because it mentions that the potential bid is still in the initial stage, it is very possible that 3G is merely running the rule over Diageo, as it would be assumed to do on all potential targets, no matter how unlikely an eventual bid. As an investment firm that makes its money from acquisitions, it would be a dereliction of 3G's duty if it were not to look at Diageo, which has had a rough time of it of late, with a relatively poor performance in its latest results.

But away from the rumours, speculation and tea-leaf reading of acquisition reporting, simple beverage business logic suggests that Veja's news story - which broke on Friday - is assumptive at best.

For a start, 3G in the past has shown more appetite for industries where profits can be maximised through cost-cutting and margin improvements. After 3G engineered the InBev and Anheuser-Busch merger in 2008, for example, management immediately slashed 1,400 jobs from the American brewer.

The company also implanted "zero-based budgeting," wherein, according to a Forbes report form March, "every expense must be newly justified every year, not just new ones, and the goal is to bring it lower than the year prior".

None of these management styles would fit well in the spirits world, where companies work to boost the bottom line more through sales growth.

Secondly, just as beer and spirits are not a good mix on a night out, in the business world the combination also leaves something of a hangover.

In a detailed note today, analysts at Bernstein point out that synergies between the two categories are only worthwhile in emerging markets - take Diageo's huge focus on Guinness in Nigeria as an example.

"In mature markets, the production assets are very different, the logistics challenges are dramatically different, the distribution channels are often completely separate and the style of sales, marketing and brand building is also different," Bernstein says.

Even splitting beer and spirits brings its own headaches. Bernstein points out that Guinness in the UK is sold in the on-trade through Carlsberg, Heineken and Molson Coors. Would they be willing to work with a company backed by A-B InBev?

Also, Bernstein suggests that US authorities would require 3G to offload the home of Guinness, St James's Gate, as they did with Grupo Modelo's Mexican assets when A-B InBev bought the Corona brewer.

Finally, there is the money issue. According to Martin Deboo at Jefferies, 3G would need to raise US$73bn to buy Diageo. That figure dwarfs the $3bn that 3G put into its share of Burger King, the $4bn in Heinz and $5bn in Heinz/Kraft, Deboo says.

Far more likely, say analysts, is that 3G will use its billions - along with more potential billions from its sometime partner, the Warren Buffet-owned Berkshire Hathaway - to snap up beer and soft drinks maker SABMiller. But while that company seems more in keeping with 3G's stripped-down operational methods, it is an acquisition that has been speculated on for a long time, with no move yet in sight.

But then acquisitions always seem to come out of the blue, after which point they somehow appear inevitable. For now, however, Diageo's takeover appears less inevitable than most.

Original news is here : http://www.just-drinks.com/analysis/analysis-diageo-takeover-unlikely-as...