Blog: Olly WehringDiageo still has the stomach for M&A

Olly Wehring | 18 February 2009

After briefly sifting through Diageo's 2008/09 first half accounts, and locating a calculator, just-drinks believes that Diageo has significantly less capacity for takeovers than after the first half of 2007/08.

The group has, of course, since acquired Rosenblum wine and stakes in Ketel One vodka and Zacapa rum, plus the financial environment is hardly condusive for raising finance for deals.

Still, we think that Diageo's liquidity remains in relatively decent shape and certainly looks to have room for low-to-medium level M&A activity, should a tantalising opportunity arise. In short, the option is there, while rival Pernod Ricard looks to be a lot more restrained after its payout for Vin & Sprit last year.

Diageo management has dropped strong hints that the company's takeover cross-hairs are, these days, trained on family-owned entities that can be built up. The Ketel One and Zacapa deals back this up. 

There are also ongoing talks with Vijay Mallya over his United Spirits business. Talk of a deal here appears premature, and Walsh publicly insisted last week that negotiations were "very preliminary".

Although Diageo would like to increase its presence in India, there remain several barriers to a deal with United Spirits. Principally, Diageo does not generally settle for less than a controlling stake in its M&A dealings, and it is believed that Mallya has so far not been willing to offer this.

Question marks also remain over the true extent of debt Mallya is facing across his UB Group, which includes United Spirits.

That said, could Diageo be waiting in the wings in the hope that Mallya requires a bail-out?
Ah, the intrigue...


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