Diageo Profits Boosted by Emerging Markets, Linked to Fortune Brands Acquisition

Diageo and Pernod Ricard are reportedly vying to buy the $10bn (£6.3bn) spirits business of US listed Fortune Brands, in what will become one of the biggest consolidating moves in the drinks industry for the past decade.

2/17/2011 --- Diageo has announced its half year results for the six month ended 31 December 2010. Organic net sales growth of 4%. Stronger volume growth and improved price/mix was delivered in North America; continued momentum in International again led to double digit top line growth in the region and top line growth improved in Asia Pacific.

Europe’s performance was weaker given the challenging economic conditions. At a group level, top line growth delivered gross margin improvement. Investment to drive growth continued with organic marketing spend up 10% and increased overhead investment, particularly in Latin America. Organic operating profit grew 2%. Returns increased with continued strong free cash flow of £775 million.

Paul Walsh, Chief Executive of Diageo, commenting on the six months ended 31 December 2010 said: “Momentum is building in our business. Our top line performance was stronger and price/mix improved. We have increased marketing spend significantly, up 10%, but in a very focused way.  35% of the increase was behind strategic brands in US spirits to build the brand equity as we move away from promotional support and over 60% of the increase was on our brands in the faster growing emerging markets. Despite the economic weakness in much of Europe, our first half performance gives me increased confidence that we will improve on the organic operating profit growth we delivered in fiscal 2010”.

The news came as The Telegraph reported that Diageo and Pernod Ricard are vying to buy the $10bn (£6.3bn) spirits business of US listed Fortune Brands, in what will become one of the biggest consolidating moves in the drinks industry for the past decade. Fortune, which last December said it was splitting its sports, security and spirits business, has hired Barclays Capital, Credit Suisse and advisory firm Centreview to sell its spirits arm.

According to the report, Diageo, which is being advised by Goldman Sachs, UBS and Citi, has been attracted by brands such as bourbon label Jim Beam, which the company thinks could be bolstered internationally.