HEARD ON THE STREET: Diageo Boosts Pension With Liquid Gold

1st Jul 2010 19:26

By Simon Nixon A DOW JONES COLUMN Got a hole in your pension fund? Diageo has come up with an innovative solution: fill it with whisky. The U.K.-listed spirits giant is to hand over GBP430 million worth of Scotch to its U.K. pension scheme to help cover a deficit last year valued at GBP862 million. Diageo will pay the pension fund an annual fee of GBP25 million a year for the right to use the whisky, providing it replaces it with new stock. And after 15 years, Diageo will buy the whisky back for up to GBP430 million depending on the size of the remaining deficit. It's a smart deal for both sides. Last year's valuation took place at a particularly bad time for asset markets that may have exaggerated the likely true scale of the deficit. This way, the pension fund gets the security of high quality collateral, while Diageo avoids the cashflow drain of much larger annual payments that trustees might otherwise have demanded to close the deficit within 10 years. By structuring the arrangement as a partnership, Diageo will continue to consolidate the whisky on its balance sheet. Other U.K. companies have structured similar deals involving commercial real estate and, in the case of broadcaster ITV, its digital television subsidiary. Of course, it helps that the market for Scotch whisky--particularly the high quality malts that will be transferred under the deal--is currently red hot. Scotch prices have continued to rise during the recession and the Scotch Whisky Association recently reported record export figures amid booming demand from emerging markets. Diageo itself recently opened a new GBP100 million distillery, the first new one built in Scotland in 30 years. The boom in liquid gold should put a smile on pensioners' faces--even if the whisky stays in the barrels. (Simon Nixon is European editor of Heard on the Street. He can be contacted on +44 207 842 9206 and [email protected]) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires July 01, 2010 14:26 ET (18:26 GMT)