Our friend George is discovering that iconic brands like Nestlé and Casamigos can be highly financially profitable. Both Nestlé and Diageo want to make sure Clooney stays on board as the face of these brands in order to either maintain (in the case of Nespresso) or dramatically win (Casamigos) market share from more established brands. Most of us would be quite jealous of someone getting paid lucrative retainer fees for the pleasure of sipping coffee and tequila, but then life’s not very fair at the best of times, is it?
The US drinks industry is increasingly debunking the rule of thumb that it takes 10 years to build a brand, with Diageo buying, rather than building, further scale in tequila. As the ninth largest producer in the world, Diageo is under-indexed in tequila, with the category representing just 1% of total revenue (at end-2017).
The transaction does make sense in terms of addressing an underexposed category (Diageo already owns the Don Julio brand), with the potential to expand the brand internationally through the company’s existing distribution channels. That said, this may prove difficult to execute given the fact that even at very ambitious forecasts for growth in Casamigos’s sales, the expected return on invested capital might only approach 7% by end-2019 based on cash outlay today.
Taking into account that Diageo’s business generates 14% return on capital, the deal with Clooney and his friends appears expensive to the extent that overall returns on capital will be depressed by this acquisition. However, the deal strengthens Diageo’s position as the world’s leading spirits producer and adds another premium brand to its portfolio while providing higher growth in a key but challenging market for the company.
Diageo trades on 20 times expected earnings for next year while offering a dividend yield of close to 3% based on forecast dividends. Diageo trades at a 5% valuation discount to its global staples peer group despite organic sales growth finally recovering. Our recent decision to sell Nestlé and increase our position in Diageo is a vote in favour of management being able to continue to effect Diageo’s slow but steady recovery to a more sustainable 3%–5% long-term organic growth rate.
Meanwhile, Clooney and the two co-founders of Casamigos – which means ‘house of friends’ – have much to raise a shot glass or two about as they ponder their new-found fortune.
