Share drop makes takeovers more desirable

The headlines have been grim, focusing on how far Wall Street and the London markets have fallen over the past couple of weeks, especially this week. Since hitting a high in the spring the FTSE100 index has shed more than 15% of its value.

But it is not all doom and gloom; underneath the bald statistics are some more positive data for the world’s big drinks groups.

Many did not fall as far as their respective market indices and they have all moved up from the bottom. And despite the headlines about investors’ nervousness, there was comparatively little selling on the way down. The vast majority of shareholders did not panic and sell out; more the downtrend was the result of market makers adjusting their books to reflect their own unease at global economic events and market manipulators selling “short” in the hope of repurchasing the shares at a lower price.

Take Diageo. Its shares have fallen by almost 12% since early July but those who bought in more than 12 months ago remain in profit; most have hung on to their shares. Throughout the recent downtrend the daily volume of Diageo’s shares traded has not been above average, except when canny buyers thought they had spotted an opportunity that the shares were cheap. For instance, on Monday more than 12 million changed hands, more than double the normal volume. Yesterday 8m were traded, which is 2m above the norm.

Earlier this week in Paris, Pernod Ricard’s shares were more than 15% below their summer peak but again most investors recognised quality earnings from a global market and sat tight as the brokers marked the shares down on short selling. But on Monday, trading in the French group’s shares suddenly leapt by more than 50% above normal daily volumes at the same time as the price was beginning to recover. Those who went into the market did so to buy a company whose shares they thought undervalued.

On Wall Street, Brown Forman lost about 14% from the mid-July high but during the slump the volume of shares traded on a daily basis was significantly below normal. Only when investors reckoned they too were cheap did volumes move towards a more normal level. Constellation Brands was subject to a similar pattern, as was Treasury Wine Estates in Australia.

This is not to say that some investors have not lost out. If they have been forced sellers, then the losses over the past 10 days have been real. For the vast majority, however, the medium term prospects of drinks companies are largely unchanged – they continue to pay healthy and rising dividends. That pattern is likely to be confirmed by both Diageo and Pernod Ricard later this month and so investors are sitting tight and trusting their original decisions.

The shares slump, however, could yet have an impact on desirable target companies. It makes them cheaper for predators, some of whom have considerable cash reserves looking for a use and are dusting down plans. This is demonstrated by Fosters in Australia. Its shares are now below the indicative level offered by SABMiller and so some shareholders are putting pressure on the board to begin negotiations.