Mergers: Sorting fact from fiction

Rumours that Diageo has been in talks with LVMH about buying the French group’s 66% stake in Moët-Hennessy should not come as much of a surprise, seeing as low share prices make companies comparatively cheap and investment bankers are desperate for fees. 

Bacardi and Brown Forman were also said to have made overtures to each other about a possible merger, and in the Far East Kirin, the Japanese brewer, was reportedly ready to buy the 53.9% it did not own in Lion Nathan, Australia’s second-largest brewer.

Only one of these rumours has proved true – so far. Earlier this week Kirin agreed to pay about £1.7bn for full control of Lion Nathan in a move to counter the effects of a shrinking and ageing population in its home market.

Diageo has refused to comment on the speculation about increasing its interest in Moët-Hennessy to full ownership and LVMH has issued a flat denial that any discussions have been held. That, however, does not mean that Diageo would not like to bring Moët and Hennessy into its stable.

Champagne and Cognac are the two big holes in its portfolio and those two brands are the only ones with sufficient volumes to give Diageo the global coverage it needs. Paul Walsh, Diageo’s chief executive, has long admired Moët-Hennessy and is looking at how best to invest the group’s considerable free cash flow. Equally, he has a reputation for driving a hard bargain.

By the same token, Bernard Arnault, the head and controlling shareholder of LVMH, would be keen to maximise the brands’ value, even at a time when luxury goods are under a global cloud. The question is whether he wants a premium alcohol business in the same portfolio as high fashion and perfume, and whether he is looking to raise funds to augment those interests while prices are depressed. We may be witnessing the opening gambits in a protracted game.

A merger of Bacardi and Brown Forman looks good on paper. There is little overlap in their portfolios (except in vodka where Grey Goose and Finlandia would come together). The real problem would be convincing both sets of owners to cede control. Brown Forman at least is quoted on Wall Street but is effectively controlled by descendants of George Garvin Brown, who founded it in 1870.

For its part, Bacardi is a private company controlled by some 600 members of an often-feuding family who have blocked previous attempts to widen control or seek a stock market listing. Even so, both companies face difficult trading conditions. Latest figures suggest that Bacardi’s Grey Goose is losing market share in the key US market while Brown Forman has announced a cost-cutting programme designed to save it up to $25m in the next 12 months. The downturn could concentrate minds in both families.

Finance on Friday, 01.05.2009