WSJ: Diageo Not Ruling Out Bid for Beam

August 1, 2013 – Diageo may consider a takeover bid for Beam Inc. as a way to strengthen its position in the North American market, according to the Wall Street Journal. The world’s largest whisky producer cited strong sales in North America as one of the key reasons for its 5% growth in profits during the fiscal year ending June 30, but lacks a major foothold in the Bourbon market.

In an interview with the Journal’s Peter Evans, Diageo CEO Ivan Menezes restated his goal of a large-scale acquisition in North America following the company’s failed bid for Jose Cuervo tequila last year:

“We have the capacity and we look at how the industry may reshape and what assets may become available,” Mr. Menezes said in an interview at Diageo’s London headquarters. “For the right ones, we have the balance sheet strength to move on them.” When asked if Beam Inc. – the Deerfield, Il.-based owner of Jim Beam Bourbon-was on his shopping list, Mr. Menezes said “we look at everything.”

Beam executives declined to comment on the statement from Menezes. CEO Matt Shattock has maintained that Beam plans to remain independent following the breakup of Fortune Brands in 2011 that left Beam as a standalone spirits company.

Diageo’s one weak spot in the North American market is its presence in the Bourbon market. The company owns the Bulleit Bourbon (and Rye) brand, which has a small share of the market, but has been known to want a larger presence. As of now, Diageo’s only active U.S. distillery is the George Dickel Distillery in Tullahoma, Tennessee.

Diageo recently created a brand heritage center for Bulleit at the long-closed Stitzel-Weller Distillery in Louisville, and it’s believed that plans are in the works to revive the distillery as a long-term source for Bulleit. Those plans may become more active now that Diageo has settled a dispute with Louisville air quality regulators over fungus on buildings near its Millers Lane maturation warehouses. The company will move 185,000 casks from Millers Lane over the next 30 months, with whiskey to be sold under the Bulleit label to be moved to warehouses at Stitzel-Weller. As part of the resolution, the head of Louisville’s Air Pollution Control District stated on the record that the Stitzel-Weller facility is in compliance with air quality regulations and was not part of its investigation.

Diageo has not officially confirmed any plans to revive Stitzel-Weller, but has been looking at ways to make the Bulleit heritage center at the site more accessible to the public and possibly add it to the Kentucky Bourbon Trail. The center is currently used as an education center for retailers and bartenders.

However, it should be noted that any Diageo bid for Beam would likely lead to potential competition inquiries in both the UK and Ireland. The UK’s Office of Fair Trading has already opened an inquiry into Diageo’s newly-acquired controlling stake in United Spirits and whether the addition of USL-owned Whyte & Mackay into the Diageo portfolio creates too much concentration in the Scotch Whisky industry. Beam owns Laphroaig and Ardmore distilleries in Scotland, along with the Teacher’s blended Scotch brand, and regulators would likely insist that Diageo sell off assets in Scotland to reduce its market share in the event of a Beam acquisition. Likewise, the OFT and Irish officials might have similar issues based on Beam’s ownership of Cooley’s brands and the Kilbeggan distillery in Ireland, given that Diageo already owns Bushmills in Northern Ireland. A Diageo/Beam tieup would put the three major Irish distilleries in the hands of just two companies, Diageo and Irish Distillers (a Pernod Ricard unit).

Links: Diageo | Bulleit | Beam