Rumored Diageo (DEO) Deal Unlikely, Says Evercore ISI (BUD) (TAP)

ABI and 3G are unlikely to buy Diageo (NYSE: DEO), said analyst Robert Ottenstein of Evercore ISI, and a pullback in shares of Molson Coors Brewing (NYSE: TAP) is a buying opportunity.

Last week shares of Diageo and Anheuser-Busch InBev (NYSE: BUD) surged on rumors 3G founders Jorge Paulo Lemann, Marcel Telles and Beto Sicupira are considering a deal to purchase Diageo. 3G owns 23% of ABI and rumors suggest it may help in a potential bid.

"Not surprisingly, DEO closed up 8%, BUD closed up 2.2%, and TAP closed down 3%. An ABI/Guinness deal would be negative for SAB and TAP’s shares, as it would likely preclude ABI from buying SAB, and TAP from buying SAB’s stake in MillerCoors," said Ottenstein. "We think a bid for all of Diageo in the near term is highly unlikely, but that it is plausible that ABI would discuss the purchase of Guinness with Diageo. However, we do not think Diageo is a seller and would we would buy TAP on the pullback."

Ottenstein thinks a bid for Diageo would run counter to statements from ABI management. He also noted limited RTM synergies between the two and pointed to huge financing risk. Ottenstein also doesn’t think Diageo is a seller.

"While beer represents ~20% of Diageo’s sales, management view the business as critical to its RTM for spirits in Africa. Beer is 60-70% of Diageo’s African business and roughly 50% of earnings for Africa ... However, sale of Guinness is not something Diageo has to do and the risk of potentially messing up Africa is, in our view, not worth the potential benefit of improved RTM in, say, Brazil."

"Unless Diageo’s was considering a major acquisition (like Brown-Forman, which has been speculated in the media in the past) it is not in need of cash," Ottenstein added.

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