Drinks giant Diageo could be a worthy take-over target for "an opportunistic rival with deep pockets or a private equity firm loaded up with cash to do deals", Russ Mould, investment director at AJ Bell has said, after a positive broker note from Citigroup led to an uptick in the firm's share price.
On Wednesday, Citigroup upgraded its position on Diageo to 'Buy', adding that the spirits firm could prove attractive to investors following the publication of its annual results later this month.
Diageo Share Price
Diageo's share price has fallen in recent months, amid challenges in its Latin America operations, and "growing questions from the market over the current management team’s ability to put the company back on track," Mould commented.
As of 2 July, the stock was trading at a four-year low, before Citi's note provided some respite.
“This situation had left the stock on its lowest valuation for 12 years at 16 times forward earnings, a far cry from the 28 times earnings metric seen just three years ago," Mould noted.
“That bargain valuation, at least relative to Diageo’s history, could make it a takeover target. [...] A prospective bidder might take the view that current problems are fixable and that now is a good time to swoop on a portfolio of well-known brands."
Longer-Term Challenges
A longer-term challenge for Diageo, however, is an increase in the number of consumers choosing to either drink less alcohol or avoid alcohol altogether.
“For years, [Diageo] rode the tailwind of premiumisation in the drinks industry, where consumers were happy to pay more for quality products," Mould commented. "However, the cost-of-living crisis showed that even wealthier individuals were paring back their spending and so it has been harder for premium-end drinks companies to grow.
“A prospective bidder for Diageo might argue the premiumisation trend could easily bounce back and that there is still a big opportunity with alcohol, as well as offering low or no alcohol versions of well-known products.”
