Glenboden M & A Originations

How much would Diageo have to pay for Moet Hennessy ?

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Origination Status reports in media, November 2010
Asset Moet Hennessy, wine & spirits business of LVMH group
Buyer prime candidate is Diageo
Seller LVMH Moet Hennessy Louis Vuitton (France), leading global personal luxury products group
Buyer Rationale cognac and champagne brands, super-premium positioning
Seller Rationale raise capital for acquisition of Hermes Group, focus on non -food personal luxury
NBs Diageo already owns 34% of Moet Hennessy
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It's well known that Diageo would love to acquire Moet Hennessy from LVMH. However given the strong growth and profitability of that business, and the success of LVMH in de-leveraging, the 'trophy' price that Diageo would have to pay appears to be prohibitively high.

Strong portfolio fit for Diageo ...The Moet Hennessy portfolio is led by 'Hennessy' cognac, no.1 globally with 35% market share in its category; also 'Moet & Chandon', France's top exported champagne brand.

It also includes a number of other attractive luxury brands like 'Veuve Clicquot' in champagne, Glenmorangie in whisky and Belvedere in vodka.

Meanwhile Diageo has no champagne or cognac brands in its portfolio. That's because those gaps have vicariously been filled by Moet Hennessy, in which it has a 34% shareholding and various distribution agreements.

MH is not only an ideal target for Diageo for portfolio reasons. It would also give a boost to the group's sluggish growth, and improve Diageo's profitability by lifting the share of super-premium in its sales way above the current <10%.

... difficult and expensive to acquire ...The main obstacle is a combination of LVMH's own financial trajectory and the enormous valuation that the MH trophy would command.

It's well known that LVMH covets Hermes, another luxury products group from France, in whom it has built a 17% stake. That acquisition would consolidate the dominance of LVMH in non -food personal luxury globally.

In theory MH, which constitutes less that 15% of LVMH's group revenues, and is its only non -food business, is non -core and could be sold to help fund the acquisition of Hermes.

In practice, LVMH's stellar financials, especially in 2010, in terms of growth, margins and de-leveraging, mean that the group might be able to fund the purchase of a business the size of Hermes without asset sales.

LVMH doesn't need to sell ...In H1 2010, LVMH grew its sales by over 20%, and its EBITDA margin by over 30%; an acceleration compared with previous years.

Thanks to strong free cashflow generation, net debt has been reduced by over 40% in a year; it now stands at about x0,6 EBITDA on an annualised basis, which is conservative given stronger seasonal cashflow in H2.

MH has an important part to play in LVMH's de-leveraging trajectory; its EBITDA margin is significantly higher than the group's average of <25% (see chart).

So, LVMH has a good reason to keep MH, and might not have to sell it to acquire Hermes. For Diageo to make a financial offer for MH that LVMH couldn't refuse, the price might need to be sky high.

... very high valuation ...By annualising MH's H1 2010 EBITDA through applying its growth rate, then using an EBITDA multiple of 20 (roughly what Pernod Ricard paid for Absolut in 2008), we arrive at an enterprise value estimate in excess of € 20 bln.

So, for the 66% of MH that Diageo doesn't own, and with a like-for-like situation vis-a-vis Absolut in terms of control premium, we end up with a deal value of nearly € 15 bln (see valuation).

... a big stretch for the balance sheetThat's a tall order for Diageo who, although also successfully de-leveraging, booked FY2010 EBITDA of around € 3,5 bln and a net debt ratio of about 2,2.

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Size (€ mln) 14.730
Sector champagne & cognac
Asset Quality no.1 global luxury branded
Seller large plc
Buyer large plc
P/S 6,75
P/Ebitda 20,0
Type value estimate 66% stake
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