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Thursday 24 April 2014

Markets see strong advances despite slumps

9th January, 2014 by Ron Emler

In 2013 most major stock markets made significant advances as the world economy moved further away from recession. But in purely calendar (and therefore abitrary) terms, the shares of global drinks groups had a mixed 12 months.

stock+marketThe biggest, Diageo, put on 10% to just under £20 after hitting £21.50 in the summer. Similarly Beam’s shares put on a further 8% to just over $65, but they too had topped $70 before sliding in the autumn.

Across the Channel, Pernod Ricard’s shares (perhaps unfairly) suffered from the disaffection with Paris stocks prompted by anxieties about the French economy. While continuing its profitable progress, the No 2 global drinks group’s shares slipped by 10% to just above €80.

Remy Cointreau’s shares put on 20% in the first quarter of the year but then slumped on the back of investor eagerness to avoid all things French. After a disastrous profits warning in November revealed the extent of China’s drinks market slowdown, the shares closed the year 33% below where they started it. The sudden departure this month of CEO Frederic Pflanz only three months after he assumed the role has deepened investor disquiet.

And in a year when its shares oscillated, LVMH saw almost 10% wiped off its market value, again partly due to doubts about demand for cognac in China.

By contrast, the best performer was the UK minnow Conviviality Retail, the company behind Bargain Booze and which bought 20 Wine Rack outlets in London for £1.65m in cash. After listing on London’s Aim market at 100p, its shares have soared by 80% in the past six months. It’s “pile it high, sell it cheap” strategy appeals to the cash-conscious consumer and there are hopes that a franchise model will boost profitability at low risk to the parent group as the number and geographical spread of its outlets widens from its northern heartland.

These hopes have been bolstered by the recent appointment of David Adams, the former head of Jessops, as chairman and the beefing up the board with two new non-executive directors. Existing chairman Roger Pedder is stepping aside as planned following the successful listing of the shares.

At the start of 2014, the significant backdrop to the global drinks groups is that they have cash in their pockets and are all looking for bolt-on acquisitions to boost their portfolios and provide routes to markets in emerging countries. And while the pace of growth in nations such as China and Brazil may be decelerating, in the medium to long term, the developing world is where much of the future volume and margin growth from premiumisation will come from.

High on the list of speculation is who will end up owning Whyte & Mackay as part of the fall-out of Diageo’s winning control of India’s United Spirits, a deal that is wending its way tortuously through sub-continental courts. To allay competition authority concerns in the UK, Diageo has agreed to sell on Whyte & Mackay including the grain distillery at Invergordon. Observers calculate that a price of  £450m would be realisable, rising to £600m if the deal includes the Dalmore single malt, which many regard as a “jewel in the crown”.

Whyte & Mackay has about 7% of the UK home market for blended scotch compared with Diageo’s 20% share.  it also holds about 18% of the market to supply own-brand blends to UK retailers. While not as profitable as premium blends and single malts, this market remains attractive as it affords economies of scale plus ownership of production facilities whose raw spirit can be targeted at a later date at higher segments of the market if global growth continues.

The list of potential buyers includes all Diageo’s main rivals, all of whom would have little difficulty in finding a sensible asking price. W&M would make a good fit with Beam’s Teachers’ brand, while it would also reinforce either Bacardi’s or Davide Campari’s portfolios. In the same vein, Pernod Ricard, the No2 producer of scotch, has said it could find an £1bn takeover of the right target without compromising is debt rating and would like the fire-power to further challenge Diageo.

Former Whyte & Mackay chief executive Vivian Immerman says he is interested in owning the company through his Vasari investment firm. Commentators say the Scotch assets would strengthen Vasari’s beer and spirits businesses in Africa.

And what of Diageo itself? New chief executive Ivan Menezes plans to make niche acquisitions in developing markets as they become available but he has effectively ruled out being a leading player in the long-speculated break-up of Beam. Former chief executive Paul Walsh was sceptical about the value to Diageo of any part of Beam’s portfolio other than the eponymous bourbon brand. And just before Christmas Menezes said that Diageo “doesn’t need” to buy Beam because it is already doubling sales each year of its own Bulleit brand of bourbon and that it plans to launch two new lines, Orphan Barrel and Blade & Bow into the ultra-premium segment. He is backing the fire-power of his production and marketing teams to fill the bourbon gaps in his portfolio.

As the global colossus, Diageo would always have an influence on any dismemberment of Beam – remember how Walsh extracted Bushmills from Pernod Ricard as part of the Allied-Domecq takeover in 2005. But with Pernod Ricard also hinting that it would not be a leading player in such a scheme on debt management grounds, it is hard to see how it would happen, unless led by a venture capitalist group. And with Beam’s value rising substantially since it became a separate company in America more than two years ago, it is looking less attractive and more likely to play the part of hunter rather than the hunted.

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