UK spirit giant Diageo is reportedly considering the US$10bn acquisition of US-based whisky major Beam. Competition regulations would likely necessitate Diageo completing the acquisition, which would include a vast array of brands in addition to the target's flagship Jim Beam whisky, with a partner and Japan's Suntory has been linked with the sale. For Suntory, the deal would facilitate further international expansion and would align with its ongoing drive to reduce its reliance on the declining Japanese market. For Diageo, the acquisition would cement its global, and certainly its North American, dominance over close rival Pernod Ricard, although in light of this the latter should certainly not be ruled out of making its own bid for Beam.
Talk of the Beam acquisition comes on the back of Diageo posting solid results for the first quarter of its 2013 financial year. Amid what Chief Executive Paul Walsh called "the uneven nature of the global economy", the company saw net sales rise by 6% year-on-year, while volumes grew by 2%. While North American growth was robust (+6%), key emerging market regions performed strongly for Diageo with Latin American and Caribbean sales up 16% and Africa sales up 11%, although Asia Pacific disappointed with growth of just 2%. These numbers justify Diageo's strong emerging market focus of late, which it has cemented with key acquisitions, the most exciting being a stake in Indian giant United Spirits, but also Turkey's Mey Icki.
While emerging market expansion has been a key driver of Diageo's growth strategy - and rightly so given the macroeconomic and demographic profiles of many of the markets that the firm has invested in - the company does still have considerable exposure to developed states. For FY12, ending June, the company generated 33% of its sales and 40% of its operating profit in North America. The acquisition of Beam would reflect an ongoing attempt to retain this emerging (high growth but low current per capita spending) and developed (high spending but lower growth) market balance, but the logic of this particular acquisition would of course depend on the price.
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Beam is expensive, with an estimated 2012 price to earnings ratio of almost 25x. Furthermore, Diageo is already in the midst of integrating other major acquisitions and the potential complications of any sort of purchase and split deal with Suntory could weigh on investor confidence when considered in the context of the maturity of the US spirits market. Nonetheless, while mature, we are forecasting 12% growth in US spirit sales in volume terms, and almost 25% growth in value terms out to 2017 and such numbers - in the context of existing strong per capita consumption, justify some premium.