Comment - Diageo's Dance with Moet Hennessy
Diageo, Moet Hennessy speculation resurfaces
Diageo has every reason to seek Moet Hennessy's hand, but the French firm's leader still has little incentive to offer it.
One can imagine what might have run through Paul Walsh's mind as Pernod Ricard reported a 45% rise in Martell Cognac sales yesterday (21 October). What would the Diageo CEO give for a bigger slice of the Cognac action in Asia, nevermind the opportunity to acquire one of the best-known Champagnes in the world?
It is a question that investors and journalists have repeatedly asked and one that has regained prominence in the last couple of weeks. On paper, it looks so enticing: Diageo has a wealth of world-beating spirits brands yet its only presence in Cognac and Champagne is via a 34% stake in Moet Hennessy.
Walsh has said previously that Diageo would like to buy out Moet Hennessy's parent, LVMH. It has the finances to do a deal. But, it takes two to tango and there is little sign that Walsh's opposite number has much incentive to join him on the dancefloor.
"The prospect of any deal is in the hands of one man, Bernard Arnault [LVMH chairman]," said Simon Hales, analyst at Evolution Securities.
Arnault is known to like the way his spirits and wine business compliments LVMH's fashion arm. There were reports last week that 61-year-old Arnault might be tempted into selling Moet in order to raise cash to buy Hermes. LVMH, however, denied any interest in selling Moet when contacted by Reuters yesterday.
Moet Hennessy's sales rose by 22% to EUR2.15bn (US$3bn) in the first nine months of the group's fiscal year, to the end of September - the second-best performance from LVMH's five divisions. Strong demand for Hennessy Cognac in Asia and rebounding sales for Moet & Chandon Champagne are unlikely to have weakened Arnault's resolve.
Hales was sceptical about LVMH seeking cash for acquisitions. "If he wanted to acquire more in luxury goods, most deals only happen at the top of the cycle and we're not there yet," he said.
Another analyst, who did not wish to be named, agreed: "Diageo would love to do it, but LVMH isn’t going to sell," she said, adding: "The Moet Hennessy activities are profitable and diversify LVMH’s total business. Plus LVMH doesn’t need the cash; there currently isn’t anything compelling for LVMH to buy."
Diageo's share price spiked yesterday, but this probably had more to do with the reflected glory of Pernod Ricard's strong quarterly sales, as well as solid results from Remy Cointreau, rather than a looming embrace with Moet.
Estimates based on previous sector deals have suggested that Diageo might need to fork out EUR10bn to get Moet. For now, though, we appear to be no nearer a resolution. "The market has been speculating periodically about Diageo buying Moet Hennessy ever since [Diageo's] inception 12 years ago and we could still be speculating 12 years from now," said Hales.
At least it gives us hacks something to think about.
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