Diageo well advised to learn from AT&T takeover bid as it looks to expand in whiskey

IF the world’s biggest spirits company Diageo wants to be a leading player in American whiskey, the experience of another major company attempting a US merger won’t give it much cause for cheer.

Telecoms group AT&T is struggling to seal approval for its $39 billion (€30bn) takeover of T-Mobile USA and analysts see in AT&T’s difficulties evidence of a tougher anti-trust stance from an administration increasingly sensitive about market share dominance and job cuts in a stagnant economy.

Insiders say Diageo, owner of Guinness, has been eyeing Beam, maker of Jim Beam and Maker’s Mark bourbons, as a way of getting greater access to North American whiskies, the fastest-growing spirits category in the US. Beam became a pure-play drinks group in October after it was spun out of Fortune Brands.

“The deal environment has changed with the (AT&T) mobile merger plan, and Diageo could well face an uphill task to convince US regulators of the merits of a Beam takeover,” said one investment banker.

A deal, likely to be worth $10bn, would push Diageo’s share of US spirits’ market above 30%. It already has 25% — nearly three times that of its nearest competitors Beam and Bacardi.

AT&T’s plan to buy Deutsche Telekom’s T-Mobile unit in the US ran into opposition in August from regulators who said combining the second and fourth largest US mobile phone operators would hurt competition.

The proposed acquisition would create a new dominant player in the US mobile market, leapfrogging Verizon Wireless and leaving No 3 player Sprint Nextel trailing in its wake.

“The AT&T move would create a virtual duopoly in the US mobile phone market, so it is not difficult to understand that regulators would look very carefully at the two biggest spirits players getting together,” said another banker.

Though Diageo has declined comment on any deal plans, analysts have widely flagged world No 4 spirits group Beam as a potential target for a breakup bid.

Diageo’s financial strength makes it the favourite to lead a bid: It had relatively low net borrowing of £8.4bn (€9.9bn) at the end of September compared to the group’s market value of £34bn and Diageo chief executive Paul Walsh has said the group has the balance sheet strength to look at purchases.

It also lacks big names in US whiskey. Beam owns bourbon brands Jim Beam, the country’s top-selling bourbon, and Maker’s Mark, one of the top six bestselling US whiskies.

Increasingly popular as an ingredient in cocktails and with the exports market, North American whiskies were the fastest growing spirit category in the region in the year to the end of October.

Bankers say if Diageo bids for Beam it would not be allowed to keep Beam’s Sauza tequila, Courvoisier cognac or Teacher’s scotch whisky because of brand overlaps. Ditching these may not be enough to satisfy regulators.

Retaining Jim Beam and Maker’s Mark alone would give Diageo a 44% share of the US whiskey market from 13% at present.

Diageo, whose brands include Smirnoff vodka and Captain Morgan rum, is the largest spirits player in the US. A big increase in market share could set alarm bells ringing in the White House.

Among Diageo’s rivals, privately owned Bacardi and Beam have about a 10% share each of the US spirits market, while Pernod Ricard and Jack Daniel’s maker Brown-Forman hold just under 10%.

“We have seen big drink deals done under a Republican administration in the last 10 years such as the breakup of Seagram and Allied Domecq and the bringing together of MillerCoors, but deals could be a little more difficult under the Democrats,” said a banker.

Regulators can technically only block deals on competition grounds, but high unemployment and risks to the US economy from turmoil in the eurozone may make them less keen to push through deals that could lead to job cuts, bankers say.

Though the US economy is expanding moderately, unemployment remains high and the housing market depressed.

Because of anti-trust concerns, both of the big US spirit deals in the last decade were breakupbids. Diageo and Pernod carved up Seagram between them in 2001 for $8.15bn, while Pernod and Fortune split up Allied Domecq in 2005 for £7.4bn.

— Reuters