Rumors can be such nasty things. Shares of Diageo (DEO) soared on Friday on the rumor that Brazilian billionaire Jorge Lemann was planning to buy the company.
Diageo is the world’s largest premium spirits company and owns, among many other brands, Johnnie Walker scotch, Smirnoff vodka and Guinness beer.
It sounded good. Lemann, after all, is a major booze magnate. His hedge fund, 3G Capital, dominates the board of directors of Anheuser-Busch InBev SA’s (BUD).
Lemann was the driving force behind the merger of InBev and Anheuser-Busch … and the AmBev-Interbrew merger that preceded it. So he knows a thing or two about making large, dominant alcoholic beverage companies even larger and more dominant.
Diageo stock shot up more than 10% on Friday on the rumors of Lemann’s move, though prices have eased today as investors are starting to have doubts.
(On a side note, Lemann is one of the more interesting personalities in finance. He’s been called “the World’s Most Interesting Billionaire” in a tongue-in-cheek comparison to the “Most Interesting Man in World” of Dos Equis beer commercial fame. He’s also a five-time national tennis champion. I want to be him when I grow up.)
Diageo Stock Doesn’t Need Lemann
Even if the rumors were true, it is unclear what Lemann’s plans for Diageo stock would be. Would he seek to combine Diageo with BUD, forming a diversified booze empire? Or would he simply wring new efficiencies out of Diageo and otherwise leave it alone? There is precedent for either scenario, though the rumors tended towards a DEO-BUD merger.
I have my doubts here. Diageo is a fantastic company, and I’ve been an owner of Diageo stock for years. It has an unrivaled collection of brands, not to mention the fat profit margins that come with branding power. It also has good exposure to Africa and Asia, two areas where BUD’s reach is a little weak.
But there are also very little in the way of synergies between a spirits maker like Diageo and a brewer like BUD. Other than, perhaps, sharing certain logistical arrangements, I don’t see an advantage to merging the two companies. In this era of specialization, I would expect better focus and efficiency from maintaining independence.
Diageo stock has been an underperformer over the past two years due to it high exposure to emerging markets. If you believe — as I do — that a long-term pivot towards emerging markets makes business sense, then buying Diageo stock now, when it is out of favor and relatively cheap, is a sensible move. But Lemann is not a passive value investor. He’s a dealmaker, and I don’t see an obvious deal here.
Bottom line: Sometimes a rumor is just a rumor.
With all of this said, is Diageo stock still worth considering?
Absolutely. Though I would recommend waiting for the deal rumors to die down. I hold shares of Diageo stock that I’ve owned for years, and I’m not planning on selling them today. But I also have no plans to buy more so long as the stock is engulfed in buyout speculation.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management.As of this writing, he was long DEO. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
