Broker snap: Possible deals for Diageo

25th Oct 2010 13:00

Nomura recommends a 'buy' for Diageo after the broker highlighted several attractive options for the drinks giant.Firstly, the broker hints that luxury goods firm LMVH's purchase of a stake in sector peer Hermes could persuade LVMH to put its drinks division, Moet Hennessy, up for sale. According to the broker, the acquisition "has led to renewed commentary" that in order to finance the bid, a sale of LVMH's controlling stake in the champagne and brandy maker is possible, and Diageo would almost certainly be in the queue to buy it.Other sector consolidation options could also become available, "with a possible break-up of Fortune Brands offering spirits brands like Jim Beam or Sauza; with the renewal of the Jose Cuervo distribution deal coming up; with premium local spirits looking more attractive," says analyst Ian Shackleton.All or any of those brands would sit nicely among Diageo's portfolio of globally-renowned brands such as Smirnoff, Johnnie Walker and Guinness."With circa £1bn of free cash flow even after dividends, we also see a renewal of the buyback to be announced with interim results in February, although at probably circa £0.5bn per annum to allow some flexibility on acquisitions," Shackleton said.The broker says that even after the recent rise in share price, it still sees the shares as attractive. as there are more visible signs of recovery in global spirits trading. The broker's target price for Diageo is 1,450p.