Is Diageo keeping its powder dry for the big one?

Is Diageo keeping its powder dry for 'the big one'?

Diageo's Paul Walsh isn't short of people telling him what to do with his company's money. So, on the back of a strong set of full-year results, Richard Woodard decided to have a nose around the Diageo stable to see what is still missing.

The higher profile the job, the longer the queue of people trying to tell you how to do it. England football manager Fabio Capello probably can’t hail a taxi without some opinionated driver telling him who should be in his starting XI, or why 4-4-2 produces more natural width than 4-3-3.

So it is with Diageo CEO Paul Walsh. Ok, I doubt that even the most garrulous black cab operator would have strong views on the future earning potential of Mey Içki but, at results time, Walsh is practically tripping over City commentators telling him just how he could – and should – be doing his job better.

If I were him, I’d be tempted to respond by flashing a few FT cuttings from not so many years ago, when all and sundry were shaking their heads at Walsh and questioning why he was allowing Diageo to fall so far behind the rest of the drinks industry in amassing wine brands.

At the time, Walsh said simply that most wine businesses simply didn’t promise sufficient shareholder return to satisfy the company – in effect saying that the boom which spawned deals like Constellation/BRL Hardy and Foster’s/Southcorp was a bubble. And, with hindsight, he was right.

Moving back to the present, Diageo’s full-year results, despite a slight under-performance caused by foreign exchange movements, seems to have prompted a chorus of financial approval verging on the unanimous.

What’s got the boys in suits especially enamoured with Walsh, however, is the bullish medium-term guidance. It’s the kind of reassuring self-confidence the City just loves, even if, in the fast-changing economic world of the 21st century, today’s fiscal guidance is tomorrow’s fish and chip paper.

Much of the optimism rests on Diageo’s strategic shift towards emerging markets, ruthlessly slashing resource in western Europe to build a leadership position in Asia and Latin America. It’s an educated gamble that the macroeconomic trends of the past few years will harden into longer-term shifts in the balance of the global economy – and you can’t argue with the logic.

In that context, Walsh may well find questions about a possible acquisition of Beam Global an all but irrelevent distraction. When his corporate gaze rests mainly on Asia Pacific, Africa and central and south America, why get all hot and bothered about a business still so reliant on mature markets?

But the drinks industry is all about brands, and Beam’s marquee names include, of course, Jim Beam itself, Maker’s Mark and Courvoisier. At one stroke, the two big spirit-shaped holes in Diageo’s portfolio – Bourbon and Cognac – would be filled. There’s only one slight snag – I’m not sure Walsh wants them.

Or, to be more accurate, I’m not sure he wants Courvoisier. No disrespect intended – Jarnac’s finest is a more than decent brand that has done some great work in key markets like the UK in the past few years – but, while Beam and Maker’s Mark are star players, Courvoisier suffers from one major disadvantage: it isn’t Hennessy.

Diageo already owns 34% of Moët Hennessy, but it has made no secret about wanting the whole lot. It may end up being one of the greatest drinks industry acqusitions that never happens, but the lure of a leadership position in Cognac and Champagne remains irresistible.

Leaving Beam to be picked up by rivals – a European tag-team of Pernod Ricard and Gruppo Campari, say – risks eroding Diageo’s leadership position in the US, but who knows? Maybe Walsh can soothe his Bourbon itch by grabbing Jack Daniel’s (yes, I know it’s not Bourbon, but even so…) and Woodford Reserve from Brown-Forman. In a premium brand face-off in the global context, Maker’s might have the edge on Woodford, but I’d take Jack over Jim every time.

All of which brings us back from brands to broader corporate strategy. Of course any of these products could be developed further in Asia-Pacific, say, but Hennessy in particular offers emerging market strength in the here and now.

Despite Diageo’s strategic shift of the past few years, China remains a relative weakness, when compared to what Pernod Ricard has achieved there with both Chivas Regal and Martell. Buying Hennessy would help solve that problem at a stroke – and it would hardly hurt Diageo in the US either.

It all hangs on one thing: is there any hope of LVMH mogul Bernard Arnault selling up? The indications from Paris have always been negative, but I wonder what Arnault and Walsh have said in private on the subject? For the moment, we’re about as likely to find that out as the Diageo CEO is to take advice – from me or from anyone else, for that matter.