Diageo Takeover Appears Unviable For 3G

09 Jun 2015

09 June 2015 --- The weekend brought much excitement as the possibility of a takeover of global drinks manufacturer Diageo by serial acquirer 3G looked like the next big acquisition story. Shares in the company jumped by over 8%. However, speculation and rumour was soon quashed as most analysts have ruled out the possibility of such a deal.

Diageo is now valued at around $47m and since Monday, its shares have fallen, as have those in brewing giant AB Inbev, which 3G has a stake in. Shares there fell by over 3%, having soared on the news of a possible takeover by its owner.

Today, many analysts have expressed that a takeover is unlikely, while investment banks Evercore and Susquehanna both issued notes to investors discounting the likelihood of a deal.

However, 3G, run by Brazilian billionaire businessman Jorge Paulo Lemann, is no stranger to the alcoholic beverage industry; indeed it is no stranger to dealing with Diageo. In 2010, 3G bought the fast food chain Burger King from Diageo for $3.3bn.

Lemann engineered the creation of the world’s largest brewer AB Inbev, a somewhat complicated chain of events which involved US, European and Brazilian brewing companies and over $60m.

Lemann bought two major Brazilian brewers, Brahma and Campanhia Antarctia Paulista in the early 2000s and merged them soon after to create Ambev, South America’s largest brewer. In 2004, Lemann merged AmBev with the Belgian brewer InterBrew and InBev was formed. 2008 saw the purchase of Anheuser-Busch, the world’s largest brewer, for $46bn, which was subsequently merged with InBev, to create AB InBev.

Today, analysts are explaining why they don’t think that the purchase of a UK spirits company would work for 3G, which is thought to be better placed on the US market and rumoured to be eyeing up a leveraged buyout of Coca-Cola.

3G is known for its cost-cutting drives in an effort to make savings and create more profit. The spirits market is highly dynamic and spends enormous amount in marketing and branding in order to add value to the bottom line.

So the spirits industry is a very different beast to the brewing industry and some at AB Inbev have expressed their concern at a possible merger, citing different business styles as a major stumbling block. Why is that significant? Business analysts feel that Diageo, with a price tag of up to $90bn, could only be bought if 3G goes in with AB Inbev and this is against what its brewing executives want.

Diageo itself has not been doing well, with a fall in profits and unsuccessful attempts to enter emerging markets making it a prime takeover target. Whilst its positioning and current status may make it an attractive option for 3G, particularly its Guinness brewing business, it may be time for 3G to step aside and give someone else a bite of the Diageo apple.