Diageo’s share price has been on the decline since a high in December 2021, a fact which, when compounded with tough markets and leadership changes, has led to market speculation on a potential sale of the UK-headquartered spirits behemoth.

Last week, AJ Bell investment director Russ Mould said the company’s “bargain valuation” meant it was ripe for a takeover.

He pointed out Diageo had seen an “extensive sell-off” in its share price over the past 12 months. Mould noted that Diageo had traded at a four-year low and that its stock was being depressed by issues in Latin America and “growing questions from the market over the current management team’s ability to put the company back on track”.

Mould said: “That bargain valuation, at least relative to Diageo’s history, could make it a takeover target for an opportunistic rival with deep pockets or a private-equity firm loaded up with cash to do deals.

“A prospective bidder might take the view that current problems are fixable and that now is a good time to swoop on a portfolio of well-known brands.”

Who could buy Diageo?

There are arguably few companies with a big enough bank balance or booming operation to buy Diageo right now.

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Diageo today (9 July) has a market capitalisation of £55.45bn ($71bn), Pernod Ricard’s valuation is €32.31bn ($34.98bn) for comparison, while brewer AB InBev stands at $98.39bn.

While not solely a drinks company, LVMH (Moët Hennessy Louis Vuitton) does have a market capitalisation of €347.89bn ($376.25bn). Its VMH wine and spirits arm was worth an estimated €6.6bn in 2023. 

“Suffice to say, it is extremely, extremely unlikely [Diageo will sell],” one industry analyst tells Just Drinks.

“Diageo is just too big for anyone apart from possibly LVMH and, given the problems they are having in Cognac, they are extremely unlikely to want to double-up on premium spirits.”

Diageo’s portfolio includes brands such as Guinness, Johnnie Walker, Tanqueray and Smirnoff. It employs over 30,000 people globally and has subsidiaries in the US, South America and Asia. It has made several investments in funding and development businesses, such as Distill Ventures and its spirits-incubator arm Pronghorn. It also has a 34% stake in Moët Hennessy.

There is an inherent complexity in taking on a portfolio of Diageo’s size. Sure, you are instantly playing in all categories, but in these dynamic markets much can be lost through transition pains.  

Diageo’s size also brings with it a number of competition-watchdog hurdles.

The EU and US regulatory authorities would give a close eye to any potential buyer and could demand a split or sale of Diageo’s assets, as seen when SABMiller and Anheuser-Busch merged into AB InBev in 2016.

A second analyst tells Just Drinks: “There’d be a lot of moving parts when it comes to different categories, even local regulators, like: do they see Scotch whisky as a category? Do they see spirits as a category? There is a lot of nuance here.”

Small-scale sales

Another possibility is that we see Diageo reduce in size over the coming years, selling bits and pieces. One analyst believes “there’s more chance of them selling off individual assets than the group as a whole”.

Last month the company sold its majority stake in its African unit Guinness Nigeria to Singapore-based conglomerate Tolaram.

Nigeria became home to the first Guinness brewery outside the UK and Ireland in 1963. However, the country has proven a challenging place to do business in recent quarters, hit by a debilitating currency devaluation that drove up inflation and ate into consumers’ spending power.

The sale of Diageo’s 58% stake in the publicly listed Guinness Nigeria is therefore arguably not a total shock, especially in the wake of other recent announcements from multinationals about their operations in the country.

Its sale of Guinness Nigeria marks Diageo’s third disposal in the African beer market in the last few years after the company sold Guinness Cameroon to Castel, as well as the Meta Abo brewery in Ethiopia, in 2022.

Both of those other operations had been losing money and struggling for market share, according to Kevin Baker, head of global beer and cider research at GlobalData, Just Drinks’ parent.

The group has also sold off smaller brands, such as its fruit-flavoured liqueur brand Safari, which was sold this month to Portuguese beverage group Casa Redondo. There was also speculation earlier this year that the spirit giant would sell off Pampero rum and the UK liqueur brand Pimm’s.

Amid these disposals, Baker says there is one brand Diaeo is “highly unlikely” to dispose of “any time soon”: Guinness.

Speaking to Just Drinks last month, Baker noted Diageo’s Guinness brand was “booming in Europe, especially in the UK and Ireland” and points to the performance of the Guinness 0.0 non-alcoholic variant, which he describes as “one of the most successful brand launches of recent years, with the company investing in a trebling of production capabilities for the non-alcoholic brand”.

Diageo holding onto premiumisation bet

Speaking to investors during the group’s half-year results in January – Diageo’s full-year results are due at the end of this month – CEO Debra Crew acknowledged a weak performance in the first half of fiscal 2024. She said it “still feels good about premiumisation overall” but acknowledged some consumers have been seeking cheaper products.

“There are pockets of downtrending and that’s what we’re navigating through,” Crew said. “Premiumisation is still there but what I would say is consumers are being smart about how they shop. They’re being very choiceful in that, so we’re still seeing a lot of normalising activity.”

In the six months ended 31 December, the Guinness and Captain Morgan maker saw its sales volumes drop 9% and 5% organically. Diageo’s net sales sat at $10.96bn, a drop of 1.4% on a reported basis and 0.6% on an organic basis.

Operating profit was down 11% at $3.32bn, while operating profit before exceptional items declined 5% organically and 7% on a reported basis.

Diageo’s CFO Lavanya Chandrashekar reaffirmed the group’s “premiumisation” strategy, particularly in spirits.

“If other competitors or other players in the market are deep discounting, we will not follow that because that’s bad for our brands, that hurts brand equity.” Chandrashekar said.

“If consumers are looking up or interested in lower price points, we have the portfolio to support it. We don’t have to a deep discount to be able to win share.”

AJ Bell’s Mould said last week that the group had “rode the tail wind of premiumisation”, however, as increasing cost of living is pushing consumers across the board to cut back on spending. Mould said this made it “harder for premium-end drinks companies to grow”.

However, he countered: “A prospective bidder for Diageo might argue the premiumisation trend could easily bounce back and that there is still a big opportunity with alcohol, as well as offering low or no alcohol versions of well-known products.”

Despite the rumblings, a sale of Diageo as it currently exists does not seem likely. The company is just too big and the headache, legally and operationally, would be significant for any buyer.

However, if Diageo starts to divest some of its brands, especially the likes of Don Julio, Guinness or Smirnoff, it could become a manageable proposition for a larger player.