Weighing The Potential Impact Of A Diageo-Moët Hennessy Deal

In recent days, luxury giant LVMH unveiled a plan to strengthen and simplify its fashion and leather goods business by bringing the Christian Dior brand fully under its control. The move set off a fresh round of speculation as to what might be next for LVMH and its largest shareholder and CEO, French billionaire Bernard Arnault—specifically, whether conditions may finally be ripe for Diageo to make an acquisition play for the 66% of LVMH’s Moët Hennessy drinks unit that it doesn’t already own.

Diageo has held 34% of Moët Hennessy dating back to its formation in 1997. While that arrangement has granted Diageo a stake in prestigious—and lucrative—global drinks brands like Hennessy Cognac, Moët & Chandon and Glenmorangie, to name a few, taking full control would significantly expand Diageo’s exposure to the rapidly growing luxury tier of the drinks industry. The price would surely be steep—Moët Hennessy’s sales grew 7% to $5.3 billion in 2016, while profits rose 10% to $1.6 billion—but so would be the potential returns.

Consider this: Diageo already owns five of the 10 largest spirits brands in the world by retail value, according to Impact Databank estimates: Johnnie Walker at $5.2 billion, Smirnoff ($3.5 billion), Captain Morgan ($1.9 billion), Crown Royal ($1.9 billion) and McDowell’s No. 1 whisky ($1.8 billion). The addition of Hennessy, ranked second globally behind Johnnie Walker at $3.8 billion, would give it a sixth member of that exclusive club.

Hennessy would be by far the biggest prize for Diageo in the U.S. as well as globally if a deal were to occur. Amid a surge across the U.S. Cognac market—of which it holds a roughly 68% share—Hennessy’s volume has increased by 45% over the past two years, to 3.7 million cases. With Cognac showing no signs of a slowdown, Diageo would no doubt be keen to get in on the action, especially given the fact that rivals like Rémy Cointreau (Rémy Martin), Beam Suntory (Courvoisier), Pernod Ricard (Martell) and Bacardi (d’Usse) are all active in the category.

Moreover, a play for Moët Hennessy would bolster Diageo’s already extensive Scotch stable with the Glenmorangie and Ardbeg single malts, and give it the world’s leading Champagne portfolio, including Moët & Chandon, Veuve Clicquot, Ruinart and others.

A further enticement is the fact that Diageo and Moët Hennessy already work with the same distributor in most states across the U.S., (although there are exceptions, such as Illinois, where Diageo is aligned with Breakthru Beverage and Moët Hennessy USA is with Southern Glazer’s). For example, Southern Glazer’s, which handles more than half of Moët Hennessy’s U.S. business and about 40% of Diageo’s, has a separate sales unit devoted to the two companies, Coastal Pacific Wine & Spirits. Likewise, Breakthru groups the two companies under its United Division. Having such arrangements already in place could lessen the potential for disruption if Diageo were to acquire Moët Hennessy brands.

While the prospect of adding Moët Hennessy’s luxury-focused portfolio has long been attractive to Diageo, the possibility of bringing a deal to fruition still ultimately hinges on whether Bernard Arnault is willing to sell—and that remains anyone’s guess. —Daniel Marsteller

(Shankennewsdaily)