Diageo sells off declining brands to focus on global blockbusters

The sale of a raft of peripheral brands fully fits Diageo’s strategy of focusing on its global blockbusters such as Johnnie Walker and Smirnoff. The strategy to sell off underperforming regional lines was announced earlier this year.

Ivan Menezes, chief executive of Diageo

While Diageo remains very much in the market for niche brands that can be scaled into global properties (the £1bn purchase of Casamigos Tequila is an example), none of the products it is selling to Sazerac fits that profile.

Most are in decline and some, such as Booth’s gin, are out of production.

Despite Diageo realising a figure at the lower end of the price bracket it had hoped to achieve, the deal is beneficial to both sides. Sazerac is renowned in the US for offering specialist spirits and will benefit from adding to its portfolio a kaleidoscope of brands targeted at regional American markets. Indeed, it made its name on the eponymous whiskey cocktail developed in its home of New Orleans the 1850s.

Diageo will use the proceeds as part of a £2bn share buyback programme it intends to complete by the end of its financial year in June 2019. Despite the sale being slightly earnings dilutive in the first year, Diageo’s shares rose by 4p to 2,750p in early trading on the London stock market, reflecting investor satisfaction that the business is on track to meet its targets.

Nor does the share buyback programme preclude Diageo from venturing into the takeover market if the right opportunity is identified. IT has plenty of financial firepower; in the financial year to the end of June 2018 it had £2.5 billion of free cash flow and a strong balance sheet.

The deal also benefits both parties in terms of production. It contains a 10-year pact for Diageo to continue producing lines being purchased by Sazerac. That will help Diageo retain some economies of scale at North American plants while not requiring Sazerac to invest in further facilities for at least the time being.