Should Diageo Forget MH and Aim for Remy?


Dear Client:

In recent months there has been speculation that Diageo may possibly acquire Moet Hennessy, Stock Spirits, Jose Cuervo and even Beam Global, to name a few, but analysts Jamie Isenwater and Jonathan Fell at Deutsche Bank say Remy Cointreau is who they should target.

WHY REMY MAKES SENSE. "Sale of its Champagne assets make Remy an attractive asset in a consolidating industry," they wrote. For one, Remy has a big presence in China where Diageo's "lack of exposure there is a key strategic concern."

It would also fill one of the two categories where Diageo "lacks presence," Cognac and American Whiskey. "Thus acquiring in Cognac not only fills in one of two missing categories but also solves the China issue."

And finally, acquiring Remy would give Diageo more US exposure on-premise, since Cointreau "is a unique, premium priced and highly profitable spirit which is a key ingredient in two of the US' top 5 cocktails (Margarita and Cosmopolitan)."

WHY MH DOESN'T. It doesn't appear that LVMH chairman Bernard Arnault is letting go of Moet Hennessy anytime soon. "We see little chance of Diageo prising MH away from LVMH (regardless of Hermes), and the opportunity cost of waiting is high." They are "very skeptical as to whether LVMH would ever sell," and "even post Bulgari, LVMH does not need to sell MH to acquire Hermes."

Deutsche rejects the argument that Bernard is more interested in luxury fashion goods than wine and spirits. Instead, they believe "Mr. Arnault is generally a buyer, not seller of assets and certainly not a seller of very high profile, very profitable 'trophy' French assets such as the Champagne and Cognac industries."

Furthermore, they do not see an obvious "margin opportunity at LVMH, nor a material amount of synergies if Diageo were able to acquire it."

HOW THEY WOULD FUND IT. Diageo's agreement with LVMH would allow it to sell back its stake in MH "at a 20% discount to 'fair value.'" Deutsche says "this would more than pay for Remy Cointreau at a 40% premium to the current share price." It would also "remove the potential of over-paying for Moet Hennessy in the unlikely event that it ever came up for sale."

They believe all stakeholders in the potential transactions listed above "would be winners out of the deal." Diageo "would fill the strategic gap that is China;" Remy shareholders and the Heriard Dubreuil family "would get a good price for their business;" and LVMH "would get to buy back the minority interest" in MH at a discount. Even Pernod Ricard, who "would find itself up against a much larger and more powerful competitor in Chinese Cognac" would see only a modest impact.

The question is: would Diageo be willing to sell its 33% stake in MH in order to buy Remy? Whether it makes financial sense or not, the companies are closely aligned in the US and Diageo chief Paul Walsh reportedly has a good relationship with Bernard. Certainly he likes the MH brands and has said he would like to own them if the opportunity presented itself. But if that opportunity never comes it might be a good time to get out of the business. Thoughts? Let us know at or at our Confidential News Hotline:


"While a lot of damaged fruit has had to be rejected, a lot of what is being accepted is very good," said Winemakers Federal of Australian chief Stephen Strachan. "Volumes are down at all price points, and there has been a great deal of pain across the industry, particularly for growers, but consumers can expect some exciting results."

The group says that reports from many Australian regions "are of exceptional quality across a range of varieties - but particularly the reds." Despite a combination of storms, fires and even cyclones, Australia's wine regions are "widely spread across a large country," so not all areas were hurt. "Some growers have really suffered - we've heard of losses as high as 60% in parts of Victoria and NSW, with some individuals wiped out - but others have reported little disruption," said Stephen. They said it is too early to estimate the 2011 vintage, but "wine availability was never going to be an issue," sine the Australian industry has experienced a glut in recent years.


DONALD TRUMP has reportedly purchased the over 700-acre Kluge Winery outside Charlottesville, Va., for $6.2 million. "We plan on re-establishing it as a vineyard, which I think will be important for the Virginia wine industry," said Jason Greenblatt, an evp for The Trump Organization. He said they will likely work with former owners Bill Moses and Patricia Kluge "to try to establish a first-class winery."

TGIC IMPORTERS HAS PARTNERED WITH IRONSTONE VINEYARDS to lead its sales and marketing operations in the United States.

INTERNATIONAL SPIRITS is introducing two new line extensions to its Ivanabitch vodka brand: Ivanabitch Red Berry Vodka and Ivanabitch Brandy.

Until Monday, Megan

"In politics, absurdity is not a handicap."
Napoleon Bonaparte

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