Are Diageo PLC & Reckitt Benckiser Group Plc The Next Targets After SABMiller PLC?

Diageo PLC (LON:DGE) and Reckitt Benckiser Group Plc (LON:RB) are drawing attention following the approach for SABMiller PLC (LON:SAB) earlier this week.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Reckitt Benckiser (LSE: RB) was among the beneficiaries on speculation that it might become a target for Pfizer,” a broker wrote this week — adding that Pfizer had reportedly been investigating a break-up of the business.

Speculation is mounting about the next big takeover target in the UK, and if rumours are to be trusted then you may well be right to wonder what is going to happen with Diageo (LSE: DGE).

Under Pressure

A takeover of Reckitt by Pfizer would go to the heart of corporate strategy for big pharmaceutical companies, which I doubt have a keen interest to diversify away from their core businesses into more commoditised, albeit less cyclical, sectors. 

Big pharma have tried to protect their drug portfolios by looking at the consumer space over the years, but the market reaction has never been great. Consider that Pfizer has a core operating margin of 36%, as gauged by its Ebit margin, while Reckitt’s stands at 26% — and it’s not even to say that Reckitt is projected to grow fast over the medium term.

The allure to invest in the shares of RB is obvious to me, however — you’d be backing a strong management team, betting on a solid portfolio of assets, efficiency and rising earnings, among other things. While it’s true that financial engineering could help Reckitt release value, a break-up might be engineered by its own management team, who decided to spin off Indivior at the end of 2014.

Pfizer is under pressure but will have to find another target to deploy its huge cash pile.

Living On My Own 

SABMiller is the most obvious fit for Diageo. Alternatively, Diageo could have been targeted by AB Inbev — very bad news on all counts for speculators.

Of course, there remains a possibility that Diageo decides to spoil the plans of AB Inbev, but the odds are short that if the price is right then SAB will choose AB Inbev over any other partners.

Moreover, I doubt that Diageo’s management team is brave enough to try and approach the board of SAB, so we really need to look at its prospects on the basis that the booze maker will continue to trade in its current form. To me its stock looks a lot like an overpriced bond, based on growth prospects, forecasts for margins, earnings and dividends. Moreover, its trading multiples point to downside of at least 10% from its current level of 1,782p, based on certain assumptions for mid-cycle margins. 

According to marker consensus estimates from Thomas Reuters, its stock is undervalued by about 10% — but I think analysts will have to reconsider their models based on a lower level of core profitability in 2016 and 2017, and possibly a lower level of revenues. If I am right, its net leverage will rise more quickly than expected — it will be manageable anyway, but then it will leave very little room for shareholder-friendly activity. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

6.9% dividend yield! 2 cheap stocks to consider for a £1,380 passive income

Looking for a market-beating passive income? These FTSE 100 and FTSE 250 dividend stocks could provide a healthy second income…

Read more »

Mature black couple enjoying shopping together in UK high street
Investing Articles

Potentially 34% undervalued, should I be watching the boohoo share price?

The boohoo share price has seen a rocky few years, but with signs that the economy is improving, could this…

Read more »

Investing Articles

Is the Amazon share price primed for a drop?

The Amazon share price has been on a tear for the last year, but can this trend continue? Gordon Best…

Read more »

Photo of a man going through financial problems
Investing Articles

Down 15% in a week! What’s gone wrong with the National Grid share price?

The National Grid share price isn't supposed to crash but now it has. Harvey Jones is wondering whether to take…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

Taylor Wimpey just paid me £158.78. I’m aiming to turn that into a £100k yearly second income

Harvey Jones says small, regular dividend payments can turn a few pounds into a mighty second income, if he gives…

Read more »

A pastel colored growing graph with rising rocket.
Value Shares

These FTSE 250 shares are tipped to rise 14% to 18% in the next year!

Looking for the best FTSE 250 momentum shares to buy? Here are two that City analysts expect to soar in…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Lloyds’ share price is up 20% in 3 months! How high can it go?

Lloyds’ share price has ripped higher recently. Here, Edward Sheldon provides his view on the level it could potentially climb…

Read more »

Investing Articles

Why the Rolls-Royce share price could continue to outperform

The Rolls-Royce share price keeps moving forward, but this Fool thinks it's still behind where it ought to be after…

Read more »