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.
Stock AnalysisA summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
Options & FuturesInvesting during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
Investing BasicsHeld onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
InvestingThe Black Friday creep may have hit a wall as some stores are shutting their doors on Thanksgiving and even Black Friday to give employees the day off.
EconomicsWill remaining calm and staying long present significant risks to your investment health?
Stock AnalysisIs DKS a bargain here?
Investing NewsA third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
Stock AnalysisHome Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
Stock AnalysisYelp investors have had reason to be happy recently. Will the good spirits last?
Stock AnalysisWalmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
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 >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
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 >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>