Diageo is moving higher following weekend reports it could be looking at a £1.2bn bid for tequila brand Jose Cuervo.
The suggestion is that the Beckmann family was considering a sale of all or part of the business, in the latest sign of consolidation in the spirits industry. Diageo, which has distribution rights for Jose Cuervo, would seem an obvious buyer. Its shares are currently up 4p at £11.47. Espirito Santo analyst Martin Dolan said such a move made strategic sense:
Tequila sales amount to 3% of Diageo's total (around £300m), and because it is a distributor, not just a brand owner, it gets much lower margins than Diageo as a whole does. Given Diageo's existing involvement with Cuervo we would very much expect them to be the front runners here, though other spirits companies will doubtless take an interest if this progresses.
This sounds like a relatively sensible and low risk development subject, as always, to the price they would end up paying.
Matthew Jordan at Matrix said:
On the negative side, we expect intense interest from Bacardi, Brown-Forman and possibly even Pernod Ricard, which will push up the price. Diageo is the likely eventual winner of any bidding war, as it will not want to see the brand exit its distribution system, but the risk of overpaying is clear.
But on the positive side, it appears that 2011 could see a major M&A spree by Diageo, after 10 years of little action. It has already announced the acquisition of Mey Icki (high growth Turkish business), is reported to be bidding for Stock Spirits Group (Central Europe) and we expect it to take a keen interest in Jim Beam once the Fortune Brands demerger takes place later this year.
Overall the market is holding on to most of its early gains, with the FTSE 100 66.65 points higher at 5784.78. Bargain hunters have re-emerged after recent falls, as hopes increase that Japan will succeed in solving its nuclear problems, while sentiment has also been helped by comments from US investment guru Warren Buffett that the current situation in Japan represented a buying opportunity.
The thought of a prolonged war in Libya, although it has helped lift the oil price by nearly $2 to nearly $116 a barrel, seems to be being ignored at the moment. Joshua Raymond, market strategist at City Index, said:
Near term resistance on the FTSE 100 lies around the 5875 mark and so it could well be here that traders need to make a decision as to whether the recent bullish recovery from monthly lows is short term or not.
