DEALTALK-Diageo awaits Hermes mist to clear to spy Moet

* LVMH stake in Moet Hennessy valued at over 11 bl euros

* Deal would make sense but depends on LVMH’s Arnault

* Diageo interested in LVMH’s 66 pct Moet Hennessy stake

* LVMH has denied any plans to sell Moet stake

By David Jones

LONDON, Oct 27 (BestGrowthStock) – Diageo (DGE.L: ) will need to pay a
high price of over 11 billion euros ($15.2 billion) to take
control of Moet Hennessy if majority owner LVMH (LVMH.PA: ) looks
to sell out to fund any eventual deal for Hermes (HRMS.PA: ).

The world’s biggest spirits group will have to match recent
top deals if it get the chance to buy the 66 percent of Moet
Hennessy it does not already own and pay a multiple similar to
Pernod Ricard’s (PERP.PA: ) Absolut vodka deal in 2008.

Taking over 100 percent of the champagne and cognac business
makes excellent sense for Diageo, but the critical factor is
whether LVMH chief and major shareholder Bernard Arnault wants
or needs to sell to fulfil what analysts say is his dream of
controlling Hermes.

“Diageo and Moet Hennessy is a deal made in heaven, it ticks
all the essential boxes, but will Arnault play ball?” said one
investment banker with knowledge of the situation.

Adding the world’s largest champagne and cognac house to
Diageo makes sense as the British group already sells the
world’s top brands in whisky, vodka, gin, tequila and liqueurs
with Johnnie Walker, Smirnoff, Gordon’s, Jose Cuervo and
Baileys, and will give it a stranglehold on the world’s cocktail

Arnault has built up a 17.1 percent stake in Hermes as part
of a long-term plan to put pressure on the controlling family at
Hermes, but analysts and bankers do not believe Arnault needs to
sell Moet Hennessy to fund any speculated Hermes move.

Analyst Philip Morrisey at Berenberg Bank values Moet
Hennessy at 20 times its historic 2009 EBITDA (earnings before
interest, tax, depreciation and amortisation) of 852 million
euros putting a price of 17 billion euros on the cognac and
champagne business or 11.2 billion euros for a 66 percent stake.

“We continue to believe that Diageo is keen to acquire Moet
Hennessy but that LVMH is reluctant to sell,” he said.

This valuation is above the average of around 15 times over
the last decade in the spirits industry — above the 15 times of
the 2005 Allied Domecq takeover but below the 25 times Bacardi
paid for Grey Goose vodka in 2004 — and close to the most
recent big deal in which Pernod Ricard (PERP.PA: ) paid 20.8 times
for Absolut vodka group Vin & Sprit.

For a graphic on the cognac and champagne markets see

For Diageo, a deal is highly attractive and would give it a
business with strong emerging market Asian exposure, especially
in China, and operating profit margins of over 30 percent, and
its Chief Executive Paul Walsh has said that he would be
interested in buying the 66 percent stake.

Analyst Nico Lambrecht at Bank of America/Merrill Lynch says
LVMH, the world’s largest luxury goods group, would not have to
sell Moet Hennessy to fund a possible acquisition of fashion
group Hermes, if that is its intention, as LVMH has relatively
low debt and ample funding capacity.

LVMH bought a stake in Hermes [nLDE69MO5T] which it topped
up to 17.1 percent earlier this week but said it was not
planning a takeover bid and will not seek any board seats. It
also denied plans to sell its stake in Moet Hennessy.

Analysts say Hennessy dominates the cognac market with
nearly a 36 percent share of the world market in volume terms
twice the size of nearest rival Remy Martin (RCOP.PA: ) and ahead
of Pernod’s Martell and Fortune Brands’ (FO.N: ) Courvoisier.

In champagne, Moet Hennessy brands Moet & Chandon and Veuve
Clicquot lead the champagne market with these two top world
brands accounting for a third of all French exports.

“We would view a deal to take full control as positive,
dependent on price, as it closes a gap in Diageo’s portfolio of
categories and increases its exposure to the fast growing
Chinese cognac market,” said Goldman Sachs’ Lucy Baldwin.

UBS analyst Melissa Earlam assumes Diageo could fund a
potential deal with 50-50 equity and debt and sees cost savings
of 275 million pounds as it could cut overheads, sales and
marketing costs and distribution savings particularly in Europe.

“Diageo has been clear about its interest in Moet Hennessy
and we believe strategically the asset is highly attractive,”
she added.

Diageo has joint ventures with Moet Hennessy in countries
like France, China and Japan, all nations with strong cognac
sales and big luxury goods markets. Analysts believe a
successful deal could also create big revenue synergies by
distributing products down each others networks.

But with around 60 members of the disparate Hermes family
holding 72 percent of the shares and as it reiterated its wish
to preserve control in the long term, LVMH and in turn Diageo
may have a long wait for their favoured deals, analysts added.
(Editing by Louise Heavens)
($1=.7242 Euro)

DEALTALK-Diageo awaits Hermes mist to clear to spy Moet