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Diageo Plans to Extend Buyback to £1bn

Posted on: Wednesday, 31 August 2005, 18:00 CDT

Aug. 28--Diageo is expected to announce plans to extend its share buyback programme by as much as £300m (E441m, $540m) to £1bn this week, despite a slide in full-year profits.

The world's biggest spirits company revealed last week that it has agreed to sell its remaining 6 percent stake in US food group General Mills in a deal that will rake in about £640m later this year.

With chief executive Paul Walsh barred from any more sizeable acquisitions to bolster the group's portfolio, City analysts expect him to return more cash to shareholders. Currency movements are expected to knock £80m from the bottom line, dragging full-year profits to £2bn.

One City drinks analyst said: "With the General Mills deal now scheduled to go through later this year, the balance sheet looks a lot stronger. It seems reasonable to expect that they will extend the buyback, and there will certainly be pressure on them to do so. It would also be a good way for Walsh to increase his earnings per share, which is something more of a pressing issue now that Pernod's takeover of Allied Domecq has gone through."

Diageo -- which owns Johnnie Walker whisky, Smirnoff vodka, Gordon's Gin and Guinness -- last week completed its acquisition of Irish whiskey label Bushmills, which it snapped up in the fallout from Pernod's takeover of Allied.

Although Walsh is expected to find more wine businesses to bolt on to his growing portfolio, competition authorities are likely to block any big deals.

Aside from the General Mills deal, the group's balance sheet has also been strengthened by a recent refinancing of Burger King, the fast-food chain it sold to venture capitalist Texas Pacific several years ago. Diageo made covenants on Burger King's debt as a condition of the deal, which have now been wiped out. Although this arrangement did not directly affect Diageo's balance sheet, it damaged its credit rating.

Analysts said that the buyback could be used as a means of trying to stop institutional shareholders from switching their holdings into the newly-enlarged Pernod Ricard -- which is expected to show strong earnings per share growth once the synergies from the Allied Domecq takeover begin to feed through to its bottom line.

Despite the expected drop in profits, analysts think Diageo's underlying performance to be strong. Excluding problems in the ready-to-drink segment of the market, it is expected to chart strong growth in the US and more progress in developing markets such as China, Brazil, Russia and India. But mature markets in Europe are likely to have suffered tough trading. The UK is likely to be hardest hit.

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DEO, DGE, GIS, RI, AED, ALLD,

Source: Sunday Business

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