2014: A year of big budget takeovers

The drinks business predicted at the turn of the year that 2014 would see notable takeover activity and deal making in the sector, and so it has proved.

As part of Diageo’s initial purchase of United Spirits in India, Britain’s competition authorities required it to offload Whyte & Mackay, which has a large foothold in the market for blended scotch. After receiving widespread interest, W&M is being sold for £430m to Emperador, the brandy producer that derives almost all its revenues in the Philippines.

A subsidiary of billionaire Andrew Tan’s Alliance Global Group, Emperador sees Whyte & Mackay as a stepping stone to a wider geographical presence for its brandies through offering a wider portfolio.

“Whyte and Mackay is a prized asset with excellent growth opportunity and it’s acquisition is in line with our plans to enhance our product portfolio,” Mr Tan, said, adding that Whyte & Mackay has a distribution network in over 50 countries that Emperador Brandy will have access to. The deal is subject to approval by Indian financial authorities because of complicated loan write-offs.

United Spirits acquired Whyte & Mackay in 2007 for about £595m but analysts in Manila say that the purchase price of £430m is roughly equivalent to last year’s sales at Emperador and worry that it is too high given the limited demand for Scotch in its Philippines home market.

In India, Diageo has taken a stronger grip on the reins of United Spirits by appointing a chief executive Anand Kripalu to run the company, where it already has majority voting rights on the board. Diageo is also putting together details of a tender offer to USL shareholders designed to increase its 25.2% stake to more than 50%. The outcome will be known in mid-summer but analysts expect the £1.13bn offer for a further 26% of USL to be successful.

Meanwhile, Suntory’s $13.6bn takeover of Beam has been concluded with the company renamed Beam Suntory but remaining headquartered in Illinois and with much of the Beam team led by chief executive Matt Shattock continuing to run the business. Suntory is in the throes of raising $8bn in debt to part pay for a deal whose high price surprised many.

In Italy Davide Campari has made a €103.75m takeover of Fratelli Averna, the Sicilian producer of grappa and bitters. The deal puts Campari in an unassailable position as the leading supplier of Italian liqueurs and bolsters its portfolio in ex-pat markets.

While other transactions, such as Pernod Ricard’s purchase of the Kenwood winery in Sonoma from Korbel for an undisclosed sum have taken place, the industry remains the at the centre of speculation about big deals in the offing.

Recently the shares of beleaguered Treasury Wine Estates jumped by 15% in a day on reports that Jean-Christophe Coutures, head of Pernod Ricard Winemakers, had said the French giant wanted to buy the Australian group’s US interests including Beringer and Stag’s Leap. Both sides have denied contact on the subject and Treasury’s new head, Michael Clarke, says the US arm is “too important to give up”, despite suffering a series of write-downs including a $148.36m hit on excess stock that last year led the company to destroy millions of gallons of cheap wine and cost his predecessor David Dearie his job.

For his part, Coutures is reported to have backtracked by implying that he would be interested in the assets if they were for sale, but they are not. Certainly the purchase of Kenwood signals that Pernod Ricard sees a profitable future in the premium end of the US wine market and so speculation has turned to the idea that it would not want the bulk wines side but is interested in premium labels such as Beringer to give it further leverage in the US.

Even more intriguing is the idea that Brown-Forman is working on a bid for Remy Cointreau. Both sides deny talks and dismiss the speculation but it has been reported that bankers representing the two sides have met. Such overtures are not unusual, not least because investment bankers need commissions, and often they come to nothing.

However, the Beam takeover has put family-controlled Brown Forman in the spotlight because it owns the leading US whiskies Jack Daniels and Woodford Reserve. The shares have jumped this year because the company is seen as a target for anyone wanting to own whiskey brand plus, contrary to competitors, its latest sales figures (for the third quarter of its year) jumped 13% and far exceeded expectations.

Brown Forman, is comparatively weak beyond its US heartland which accounts for 40% of turnover and although emerging market sales grew by about 12% last year, the group needs a stronger global distribution network. It opened a European head office in Amsterdam last year.

By contrast, Remy Cointreau exited the Maxxium consortium five years ago to focus on its own distribution network and now has good representation, especially in Asia. Some 87% of its sales are made through its own network. The problem it faces is that 40% of its cognac profits come from China where the austerity drive has knocked a big hole in this year’s returns. While all players are affected by the same problem, having more of its eggs in the China basket means Remy will take longer to rebuild the lost turnover, especially as its portfolio is comparatively narrow.

So, the argument goes, not only do the companies know each other from their days together in Maxxium, they also provide solutions to present problems, Remy through its network and Brown Forman through its wider and more buoyant product range.

Brown Forman is valued at about $19bn, almost five times Remy Cointreau’s $4bn stock market price tag. Any takeover offer would need to be at a large premium to convince the controlling families to sell out. A merger would also require one side (the French) to surrender control. But the very fact that arm’s length talks via bankers have taken place means that Brown Forman is intent on rapid consolidation globally.