Walsh looks for disciplined acquisition strategy

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In the second part of an exclusive interview with just-drinks, Diageo chief executive Paul Walsh talks to Olly Wehring about the company's recent acquisitions and future acquisition plans.

As the number one drinks company in the world, Diageo is never far from the headlines of the financial press when mergers or acquisitions are being discussed. As the dominant force and a company which has expanded through acquisition in the past, Diageo is constantly linked with this or that takeover, even if in numerous cases the speculation turns out to be just that.

So far this year, the company has completed the acquisitions of Bushmills Irish Whiskey, Chalone Wine Group and Ursus Vodka, while spurning an option to buy Montana from Pernod Ricard in the Allied Domecq carve-up. It may not be Diageo's most prolific year of acquisitions, but it's a tidy haul nonetheless.

The most recent was its purchase in August of Bushmills Irish Whiskey for GBP200m. Walsh says the company has made a good start with Bushmills and is very upbeat about the brand's future with Diageo. "It's very early days, as you know," he says, "but I think we're off to a great start." The Diageo CEO is delighted that the group finally has an Irish whiskey brand in its stable, and suggests that Bushmills may have suffered from being in Jameson's shadow at Pernod. "Whilst it was not the number one (Irish whiskey) as part of the previous owner's portfolio, it is now the number one as far as we're concerned. So philosophically, that'll spur the brand to grow. Between the UK, the US and other markets, we're confident that we can get this on to a very nice growth trajectory. I think the great thing about this brand is that we don't need to innovate - it's a great pack - but clearly it's been managed as a number two brand with the focus for growth going against the other brand in its stable. Now it's on its own - let this yearling run!"

Moving on to the group's wine division, I put it to Walsh that the wine side seems to lack a definite direction. "Well, first of all, I think we have a big wine business; it's just small in proportion to the rest of Diageo. I have said that I like the consumer dynamics of wine and would like to grow it. But we will only grow by acquisition when the economics make sense."

Eyebrows were raised last month when Diageo passed on the option to buy the New Zealand-based Montana wine business after Pernod gave it first refusal on the company on completion of the Allied Domecq acquisition. Walsh is reluctant to discuss the issue in depth. "There's only so much I'm allowed to say about the Montana situation," he warns, "but the economics of that transaction didn't work."

While Walsh concedes that the Montana business did have its good points, particularly in the European market, the brand's domestic situation made it less attractive. "Let's not forget that two-thirds of Montana is sold in its domestic market in New Zealand that is under a lot of price pressure," he says. "All I can really say is that the mix and the pressure that the brand is under domestically was a factor."

Overall, Walsh appears pleased with the performance of the group's wine interests, but warns that acquisitions will not come at any price. "If you look at BV (Beaulieu Vineyard, from California), if you look at Sterling (Vineyards, also from California), they've got phenomenal growth rates, tremendous recognition for the quality of wines we produce. And then even in the UK, you look at Blossom Hill. It's the number one wine in the supermarket channel. So, yes, we've done well in wine, but I don't believe in tilting at windmills - to make acquisitions that don't make economic sense just to get bigger in wine. I would like to get bigger in wine but we will do so judiciously."

The word acquisition reminds me of the current takeover target in the wine industry, Vincor. Surely, Diageo has taken a look at the Canadian-based winemaker? "There are parts of Vincor that aren't bad," Walsh concedes. "I don't think the whole of Vincor is for us, but pieces of it are." Walsh downplays any interest the company may have in Vincor by ruling Diageo out of being a major player in the purchase.

We move on from M & A to the perennially controversial issue of binge drinking and alcohol abuse. In common with most drinks companies, Diageo understands the need for the industry to promote responsible drinking but as the number one player with so many prominent brands, its exposure to the issue - and to the bad press it can generate - could not be greater.

Paul Walsh

Walsh is fairly realistic about the struggle facing the industry, retailers and the authorities, but warns that the media appears only to be fanning the flames. "I think, unfortunately, we have a perfect storm scenario in the UK at the moment," he says. "Where you have an issue, unquestionably, with binge drinking, let's not forget that more than 98% of the population consumes alcohol responsibly. So we're dealing with a very small number of people who admittedly cause social problems. Then you have the whole rhetoric around flexible licensing hours - unfortunately, it is not referenced as flexible licensing hours. It's classified as 24-hour drinking. The average person, therefore, can be excused for thinking that every pub on every corner will be open for 24 hours a day - we know that that isn't going to be the situation. But I think what those two issues do in the minds of the average person is make them question what's going on here. I think that people are somewhat misled."

A riddle that Walsh feels is proving difficult to solve is the approach to drinking favoured by some Britons. "One of the issues that perplexes us in the UK is why there is an issue of a certain group of people who want to go out seemingly with the sole intention of drinking to excess," he says. "That doesn't appear to be as significant an issue in other markets, so why is it here? And we haven't come up with any answers because, when you segment that group, it's men and women, it's white-collar and blue-collar, it's highly-educated and average-educated, it's affluent and not-so-affluent. Whichever way you slice it, it doesn't fall into a certain category."

As our interview draws to a close, I wonder aloud where growth in the future for Diageo will come from. "Broadly speaking," he says, "we have to grow organically. But because of our size we forget that in the past year, we bought Ursus, the Chalone Wine Group and Bushmills (for collectively around US$873m). That would get the attention of most journalists but, because it's relatively small given the size of Diageo, it doesn't. So we can still grow through acquisition, but we are very disciplined around how we allocate our capital, and we will continue to exercise that discipline. There are other brands out there - I'm not going to comment on what they are - that would fit us very well."

So while Walsh stresses the need for organic growth, acquisitive expansion has been a constant feature of Diageo's progress and, notwithstanding the CEO's insistence on discipline and selectivity, is likely to continue to play an important role going forward. As Walsh put it when asked whether the days of multinational brands changing hands had come to an end: "No. I think consolidation will continue."

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