Paul Walsh calls time on Diageo: Outgoing boss will leave the global drinks giant in high spirits
Tuesday 07 May 2013
Ivan Menezes celebrated his success landing the job as boss of the world's biggest drinks company, Diageo, with a glass of Johnnie Walker Blue Label whisky on the flight from London to New York. The promotion of the chief operating officer and company insider didn't scare the horses in the City as the shares barely twitched. But as he sipped the £130 liquor on the plane Mr Menezes might well have pondered the shoes he will have to fill when Paul Walsh, the FTSE 100's third longest-serving boss, departs.
Mr Walsh is widely credited with having steered Diageo from reliance on slower-growing drinks such as Guinness and Smirnoff, sold in mature markets, into faster-growing, emerging markets and edgier products, spending more than £7bn on acquisitions in the process.
Little is known about the Lancastrian's intentions when he steps down as chief executive at the end of next month, though given that he is only 58 a FTSE chairmanship may beckon. He will stay on as an adviser to Diageo and Mr Menezes until June next year, picking up his £1.2m basic salary in the process. He may find time for a spot of big-game hunting on his 2,400-acre estate in South Africa and add a few more trophies to the mounted heads in his study.
Mr Walsh is a colourful character who revels in a reputation for plain speaking and attracted tabloid attention with a messy divorce in 2006. But his favourite hobby offers an obvious metaphor for his corporate career, during which he has brought down more than a few big beasts. Mr Walsh became chief executive in September 2000, having joined Grand Metropolitan – which later merged with Guinness to form Diageo – in 1982. His 13-year tenure at the top of a FTSE blue-chip company is beaten only by Aiden Heavey of Tullow Oil and Sir Martin Sorrell of WPP, who founded their companies in 1985 and 1986 respectively.
He quickly set about turning a flabby consumer goods company, described by The Economist three years after the merger as "mediocre", into a drinks business. He sold off Pillsbury, which then owned the Green Giant and Häagen-Dazs brands, and Burger King to fund a move to buy the Seagram drinks business in a joint venture with Pernod Ricard. The $8.2bn (£5.3bn) deal set out the Diageo – and Mr Walsh's – stall and brought Captain Morgan rum into the stable.
It was followed by a succession of smaller deals focused on premium spirits and emerging markets. These included the 50/50 joint distribution venture with Ketel One vodka in 2008, building up a minority stake in India's United Spirits and acquiring a majority stake in China's biggest seller of rice wine, Shui Jing Fang. The United States, a division led by Mr Menezes for eight years, remains central to the group but Diageo is closing in on achieving its target of 50 per cent sales from emerging markets by 2015.
But how has Mr Walsh been for shareholders? He has added £30bn to the value of the company in 13 years, turning a £20bn company into a £50bn one. Diageo has also paid out around £12bn in dividends and turned operating profits of £2bn into earnings of £3bn over that time, which is not to be sniffed at. On top of that the share price has nearly quadrupled – though according to the Investec analyst Martin Deboo, long-term investors would have done even better putting their cash into rival company Pernod Ricard.
Mr Deboo argues that Mr Walsh's tenure was "a game of two halves", saying: "Since his appointment in September 2000, £100 invested in Diageo has grown to £538, relative to only £148 for the FTSE 100. However, £100 invested in arch-rival Pernod at the same point is now worth £671. This reflects sharp out-performance in the 2000-2007 period, when Pernod's shares quadrupled in value, while Diageo's less than doubled. Diageo only really got their share price outperformance mojo working from August 2011 onwards, with a much more vigorous strategy of top-line acceleration, cost reduction and bolt-on acquisitions in emerging markets."
On the leadership change, he adds: "We see this as a well-flagged change that is unlikely to have much impact on the shares... For us, Mr Menezes' immediate priority will be to deliver on Diageo's organic growth agenda, which has looked less sprightly recently."
Those concerns were fuelled by a blip for Diageo in its most recent quarter, when growth slowed from 5 per cent in the first half of the year to 4 per cent – short of City hopes. The company was up against tough comparisons with strong trading last year. It also struggled with the timing of shipments, which affected sales, although its US market once again underpinned sales and Diageo insists the fundamentals are unchanged.
Indeed – aside from the minor gripes over its underperformance against Pernod Ricard – it's hard to find voices in the City who believe the wheels are about to fall off with the departure of Mr Walsh. The succession has been handled smoothly and it is hard to draw comparisons with the likes of Apple and Tesco, whose shares have suffered badly since the departure of long-serving chief executives. "Diageo are a big company and they have plenty of strength on the bench. Walsh was the steward of the business rather than its creator," said one analyst.
The short-sellers are yet to move in on the firm either. According to the financial data provider Markit, just 0.2 per cent of the company's stock is on loan with short-sellers to bet against the firm, against an average of 1.3 per cent for the FTSE 100 overall. The outgoing boss can drink to the health of his global giant.
How it all measures up
£11.2m How much Paul Walsh received in pay and bonuses last year
5 per centDiageo's sales growth for first nine months of financial year
4 per cent Sales decline in western Europe over the same period
£10.76bn Diageo's net sales for the last financial year
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