December is the season for rumors in the financial markets, as there's relatively little actual news for reporters and columnists to discuss. With that in mind, a weekend piece in Britain's Sunday Telegraph regarding a potential merger between Diageo (NYSE:DEO) and Beam (Nasdaq:BEAM) should be taken with more than a few grains of salt.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

A Little Smoke, but Not Much Fire
To be fair to the Telegraph, the weekend's article did not state that negotiations were ongoing, but rather that Diageo had worked on a possible bid in the spring/summer of 2012. According to the rumor, though, Diageo was prepared to pay $65 per share, or approximately $10 billion for the spirits company. Adding an interesting twist, Diageo wasn't going to be going at it alone. Apparently, the company was looking for partners - either Japanese spirits and beverage giant Suntory or private equity groups.

Beam Would Make Sense ... but Only to a Point
On first blush, a bid for Beam would seem to go against Diageo's stated objectives with its M&A strategy. Diageo has approached acquisitions from the viewpoint of how they add to the company's emerging market exposure and/or how they impact top-line growth. As a lower-growth spirits company focused on developed markets like the United States, Beam would not seem to clearly meet either objective.

That said, Beam does have one thing that Diageo lacks - a strong U.S. whiskey/bourbon business. Beam likely has about one-third of the U.S. bourbon market (Brown-Forman (NYSE:BF.A, BF.B) is a major player as well), while Diageo has minimal presence there. Given that bourbon has been gaining share on other spirit types, it could make a certain amount of sense for Diageo to bulk up in an area where it currently has minimal exposure.

SEE: Mergers & Acquisitions: An Avenue For Profitable Trades

How Much of Beam Could They Keep?
One big obstacle to a Beam deal, and a reason why Diageo would almost have no choice but to make a bid with a partner, would be anti-trust objections. Combining Diageo's Hennessy with Beam's Courvoisier would give the two companies about three-quarters of the U.S. cognac market, and the two companies would likewise have more than half of the Canadian whiskey market. Last and not least, with Diageo's publicly-announced negotiations to acquire the Jose Cuervo tequila brand, there would be a potentially problematic overlap here as well.

Ironically, while those three brands could create a problematic overlap, there's not much else outside of the bourbon business that would help Diageo. Beam wouldn't add much in areas like scotch, rum or vodka, and I'm not sure that niche products/brands like De Kuyper or Skinnygirl would be all that important to Diageo. In other words, that's a lot of hassle to get the bourbon business.

More Deals, Just Not This One
It was only a matter of time before the Beam-Diageo combo rumor came up for air again; Diageo has been tied to many other well-known spirits companies in the past. That said, I suspect that Diageo will stick to its current emerging market focus. The company has bought into three emerging market spirits businesses this year, including a Brazilian cachaca producer and India's largest spirits company, and there's plenty left to choose from around the world. That said, deals focusing on China would make ample sense, as Pernod-Ricard (OTC:PDRDY) continues to hold more share in this fast-growing spirits market.

SEE: An Evaluation Of Emerging Markets

The Bottom Line
It's hard to say how much information leaked about Diageo's potential interest in Beam at the time the company was reportedly considering the deal seriously - Beam's stock price did spike early in the summer to nearly $65 (the rumored bid price) before easing back into the $50s. Given past deals in the space, though, Diageo would probably have to go north of $70 to even get Beam's interest and I'm not sure that's very likely given the hassles (divestitures and so on) that would go into a deal. Nevertheless, the ongoing consolidation of the spirits business does offer a good reminder as to why so many of these stocks continue to support robust double-digit EV/EBITDA multiples.

*Shortly before publication, Diageo announced that it had ended negotiations to acquire Jose Cuervo.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Investing

    Factors Driving Kroger's Success

    Kroger’s focus on optimizing customer experience and cultivating its own product lines has proven to be successful strategy.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!