Diageo tests market for Sichuan Swellfun stake

Diageo is reportedly considering the sale of its controlling stake in Chinese baijiu producer Sichuan Swellfun as part of a wider programme of disposals. The move would mark another step in efforts to cut debt under new leadership.

If rumours are to be believed, Diageo is poised to sell its 63%-plus stake in Shanghai-listed Sichuan Swellfun, the Chinese group which produces the Shuijingfang brand of baijiu. Other assets in China could also be sold.

Bloomberg reports that banks have been testing the waters with potential buyers. The company is valued on the Chinese markets at about £2 billion, making the stake worth about £1.25 billion.

Shares in Sichuan Swellfun have dropped 14% in the past year, and in November, Diageo reported a double-digit sales decline in China.

Debt reduction strategy

Diageo has spent the last year under interim Chief Executive Nik Jhangiani seeking ways to offload underperforming assets and thus improve its balance sheet and reduce debt.

Late last year, it announced its plans to sell its 65% holding in East African Breweries to Asahi of Japan for $2.3 billion, and it is widely expected to dispose of its Indian champion cricket team, Royal Challengers Bangalore, which is said to be worth more than £2 billion.

That disposal is expected in the next few weeks before the new Indian season begins.

If all three disposals take place, Diageo will raise approximately $6 billion.

New leadership and outlook

Any new asset sales will be dictated by the new CEO, Dave Lewis, who formally joined the company on January 1.

Although Diageo is following its normal practice of not commenting on market rumours, Bloomberg says the spirits giant is working with Goldman Sachs and UBS to review its operations in China.

Lewis has a track record of making strategic disposals and cutting costs in his tenures at both Unilever and Tesco and investors will be expecting him to announce the outline of his strategic plans in late February when Diageo publishes its financial results for the first half of this financial year.

He has already made personal visits to key parts of the group’s empire.

Background to Shuijingfang

Diageo bought its controlling stake in the Shuijingfang in 2012 as one of the last strategic moves under Paul Walsh.

His successor, the late Sir Ivan Menezes, said the brand’s strategic importance would be in premium sales to the vast Chinese diaspora rather than in the “home” market, but that aspiration has never fully materialised.

Meanwhile, demand for baijiu in all forms has been diminishing and prices falling, as reported by the drinks business.

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