The boss of the world’s largest alcoholic drinks company this week warned that bidders were in danger of paying silly money as further consolidation took place in the sector.
Referring to Pernod Ricard’s bid for Allied Domecq, Diageo chief executive Paul Walsh said he was surprised such activity had not already happened and that it would happen again in the future.
Industry analysts agreed that the deal, if it went ahead, was likely to trigger a further round of consolidation, whereby smaller companies may merge in order to keep pace with the two leading giants.
But Walsh questioned the amount of money being put on
the table, comparing it to the last major acquisition, when Diageo and Pernod Ricard between them carved up the acquisition of Seagram in 2001.
He said: “Seagram was bought at 9.5 times EBITDA [earnings before interest, taxes, depreciation and amortisation],” said Walsh. “The latest deal is a multiple of 14 times EBITDA. The industry logic is there but the financial parameters are getting pretty stretched.”
Walsh said he did not expect to see private equity companies jumping into the battle.
“There is no role for private equity. What can it do better than the industry is already doing?” he asked.
Commentators believe Pernod Ricard’s joint £7.1bn bid with US-based Fortune Brands for Allied Domecq would put serious pressure on Diageo as the resulting company would be large enough to emulate Diageo’s distribution strategy.
However, Walsh dismissed this view. “I don’t think any of it is bad for Diageo.
“We will still be twice the size of our competition in most markets,” he said.
Speculation this week has also surrounded the possibility of additional bidders for Allied Domecq, such as Bacardi, but the rum brand owner is understood to be more interested in getting involved if Allied’s assets become available following a sale.
Such a break up of Allied would also suit both Pernod Ricard and Fortune Brands, who wish to expand in the US and Europe respectively.
Pernod is believed to be planning a formal offer announcement to coincide with Allied Domecq’s interim results on April 21.
Siân Harrington and Sonya Hook