A Tale of Two Beverage Buyouts

As I mentioned yesterday, the last two weeks in August are typically among the slowest for Wall Street, but no one told that to adult beverage giants Heineken N.V. (HINKY) and Diageo Plc (DEO). 

Both these companies are flush with cash, and each is opening up its war chest to buy out the competition. The recent round of merger mania is certainly getting Wall Street buzzing, but are these true blue profit opportunities? Let’s take a look at the details.

This morning, Heineken snapped up an additional 1.4% stake in Asia Pacific Breweries Ltd., maker of Tiger Beer, one of the most successful brands in Asia. This brings Heineken’s stake in the Asian brewery to 43.3%, so in order to seal the deal it needs to convince joint venture partner Fraser & Neave Ltd. to part ways with its 39.7% stake. If Heineken can do so, it would then make a general offer to other shareholders for the remaining 17% of the company. However, Heineken isn’t the only one with its eye on Asia Pacific Breweries; it is competing with Thailand’s Kindest Place Group, which has put forth a slightly higher offer.

Heineken is the third-largest brewer in the world, and the upside here is solid. But because it only trades on the pink sheets and is relatively illiquid, I would steer you towards the U.K’s Diageo Plc, which is headed towards an even bigger potential buyout and is an even better buying opportunity.

Diageo is known for having several of the world’s best-selling spirits: Smirnoff, which is No. 1 for vodka, Johnnie Walker, No. 1 for Scotch whisky, Baileys, No. 1 for liqueur, and Guinness, No. 1 for stout. On top of this, Diageo is the sole distributor of Jose Cuervo, the No. 1 tequila.  But management has revealed that it wishes to be more than simply a distributor of Cuervo, so Diageo is taking steps to buy out the $3 billion tequila business.

Rumor has it that the deal may be announced as early as this week when the company publishes its annual results.  Other sources expect that negotiations between the two companies will continue into September or even later. Either way, time is of the essence since Diageo’s current international distributor contract with Cuervo expires next June. 

Of course, the potential Cuervo deal isn’t the only acquisition for Diageo on the table recently. In the past several months, Diageo has shifted into full buyout mode: At the beginning of July, it acquired Cabin Fever Maple Flavored Whiskey to increase its exposure to growing demand for flavored whiskey in the U.S.  Around that time Diageo also plunked $1.5 billion into Scotch Whiskey production, a business where net sales have grown 50% in the past five years.

With a 2% annual dividend yield and strong growth prospects, I consider DEO a strong buy. If you’d like more information on this stock, I have the full breakdown in Portfolio Grader.


Louis Navellier

Louis Navellier

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