Broker consensus
Berenberg
According to Brazilian news weekly Veja, 3G (the Brazilian owner of ABInBev) has been studying the possibility of acquiring Diageo. Is this a possibility? Yes. Diageo ticks most of the boxes in terms of what 3G normally looks for in an acquisition target: 1) relatively stable cash flows; 2) strong established brands; 3) potential for restructuring; and 4) good exposure to the US. Also, it would further diversify its existing consumer portfolio away from beer and food. A bid could be structured in conjunction with ABInBev. Diageo is the owner of Guinness, a prized beer asset that could be of interest to ABInBev. We estimate that Guinness generated EBIT of cGBP700m in FY 2014, meaning that it could fetch a valuation of as much as GBP11bn-13bn. The other possibility is that 3G would consider breaking the group up and selling all of its brands to industry competitors if it considers the sum of the brands to be greater than the value of the total group. In order to succeed, Diageo shareholders could possibly demand that a bid comes at least in line with recent consumer transactions (ie at a 20-25% premium to the existing share price).
JP MORGAN
Diageo (DGE LN, N – 1,761p, PT 1,900p) (Komal Dhillon)
Attractive piecemeal value though operational headwinds remain. Upgrade to Neutral
Operational underperformance has led to a -4% YTD (versus the European beverages sector up 10%) decline in Diageo’s shares on an
absolute basis and -8% against the FTSE. There has been press speculation (Brazilian newspaper Veja) over the weekend regarding a
potential bid for Diageo by 3G Capital. Details are scarce but we believe Diageo’s beer assets, which would give ABI a foothold in Africa,
could be the main appeal. While we still see operational headwinds, we believe a piecemeal value of Diageo could be attractive and
upgrade to Neutral.
CREDIT SUISSE
Diageo (N, TP GBp1800.0): There has been widespread speculation in the media that 3G may be in the early stages of considerign a bid for Diageo, following an initial article by well informed Veja columnist Lauro Jardim last week. Diageo is very exposed, management credibility is low, thus, in our opinion, any bid would be well received by investors. Assuming an offer at a c30% share price premium, and gearing up to similar net debt/EBITDA ratio as Heinz was (8-9x), we estimate 3G would require -£40bn of equity to fund the transaction pre asset disposals, which could involve the beer business (£10bn) to ABI, wine (£1bn) and the 34% stake in Moet Hennessy (£3.5bn). So that's £25bn of equity post disposals. For 3G, aside from cost savings, the prize could be a higher multiple on the largest international spirits business in the world. What is Diageo's defense? Replicate 3G's strategy, instill a zero based budgeting savings program, dispose of non spirits assets. With the shares having already gone below our Target Price, and an increased speculative angle impacting the share price we raise our rating to Neutral.
CITI
Diageo (DGE.L) — 3G Bid Possibility Could be Catalyst for Change
and Outperformance
Western Europe | Beverages | Buy
Difficult to say whether the 3G-Diageo report is credible, but Diageo seems the sort of target 3G would consider (strong brands, cost cutting potential on 3G
standards, opportunities to unlock value, 2 years of operational underperformance). We doubt anything would happen soon, but at the very least,
we believe this will (1) increase pressure on Diageo mgt to consider actions that would restore confidence/unlock value, (2) underpin valuation. In this note we go
through 8 actions mgt could/should consider, including selling non-core assets, setting performance targets, raising BS gearing to buy back shares, reviewing
some senior management positions. IF 3G were to acquire Diageo, we think it is likely that they would sell the beer assets to ABI. In this scenario, we believe ABISAB
would be much less likely. We reiterate Buy on Diageo, but we have cut EPS 3.5% (mainly FX) and reduced target to £22 as a result.
Morgan Stanley
reiterates Overweight rating, price target 2,200p - Firm sees underlying momentum improving in its key markets which should help narrow the 10% discount the shares trade at vs Consumer Staples