MARKET COMMENT
Cheers, Diageo!

By Rob Davies
December 20, 2000

Carburton Street, London -- A forced disposal of a business can offer good opportunities to the smart buyer. When the business being sold is large, and therefore only available to a few well-endowed purchasers, the scope for a good deal is even better.

This seems to be the case with the joint purchase of the Seagram drinks business by Diageo (LSE: DGE) and Pernod Ricard. This business is being sold because Vivendi, the French conglomerate, has bought Seagram for its media interests and has to sell the drinks side in order to reduce debt. However, early indications that the price could be as high as $11b deterred some buyers simply because their pockets were not deep enough.

To tackle this problem Diageo is collaborating with Pernod Ricard in a ratio of 61.4% to 38.6% in its favour to make the purchase. Moreover, the actual price paid has fallen to $8.15b (£5.5b) and included in that are businesses that will be sold because neither party wants them. Those assets are expected to fetch $670m, of which Diageo's share will be $410m, thus reducing its net cost to $4,690m. For that the company acquires a bagful of premium brands and cements its position as the leading beverage alcohol business in the world.

In terms of earnings this purchase will add $530m (£353m) of operating profit from $1,090m of sales. However, it does expect to incur $700m of costs to integrate the business. That will have an impact on profits next year, but after that the deal is expected to boost earnings per share.

The drinks business is not growing very fast, but it is large and stable. Investors looking for a genuine blue chip company could do worse than take a hard look at this one. Even after the meteoric rise in the share price this year from around 400p to the current level of 688p it still only has a price to earnings ratio of 16 and its dividend yield of 3% is 50% higher than the market as a whole. Cheers!

Where Next?

Diageo discussion board