Diageo (N, TP GBp1800.0): There has been widespread speculation in the media that 3G may be in the early stages of considering 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.