Time for Diageo to demerge?

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The Independent Online

There used to be a conglomerates analyst in the City who would drive her husband crazy by spotting brands that were part of the Hanson empire when they went out. In its prime it owned everything from Lea & Perrins' Worcester Sauce to Elizabeth Shaw chocolates; London Brick to Consolidated Goldfields; Ever Ready batteries to Eastern Electricity.

But the fashion for conglomerates passed long ago. Hanson was broken up in a rather messy demerger; BAT unbundled everything from Eagle Star to Argos, and BTR painfully shed many skins before it was subsumed by Siebe to create Invensys.

But there are still some conglomerates left - the ever-decreasing Tomkins; the ever-increasing Nomura portfolio, and ever-pressured Diageo.

It pretends it is integrated, but in truth Diageo is a conglomerate. It's made up of two, three, or even four organisations that have no business together. Diageo's synergies have long been trumpeted by John McGrath and his team but are - in Lord Hanson's inimitable phrase - "like a yeti: many believe it exists, but no-one has any evidence."

I fail to understand why the brewer of Guinness needs to be in the same organisation as the distiller of Johnny Walker whisky, except because of historical accident. And why these two want to be cheek-by-jowl with the Pillsbury dough boy is hard to fathom, as is how the Burger King empire of franchised fast food restaurants fits into this mêlée.

Diageo has long argued - or at least in the four years since it was created by the merger of Guinness and Grand Metropolitan - that its powerful marketing and distribution network means that it can support all these brands more powerfully than less substantial businesses.

But analysts who follow Diageo argue that this is just not borne out by the figures, and, given Diageo's dominant position in some spirits markets, it should be doing a lot better.

Worse, there is a feeling that some of the food brands are suffering from being part of such a leviathan. Recently, we saw Burger King franchisees take their long-standing protest at control from the centre to Wall Street, where they hired advisors to look at buying the business out of Diageo. Even Diageo admits it could do more for Burger King. But its argument against selling it is a potential £1bn tax bill.

Well, to quote another businessman - "you should never let the tax tail wag the business dog". In other words, if a deal makes strategic sense, find a way of getting round the tax problem.

Diageo's problem is that it's losing the faith of its investors. McGrath retires at the end of this year and, admired as he is for creating the business despite objections from major shareholder Bernard Arnault, there are questions about how committed Diageo would be to staying together without him at the helm. Arnault still owns more than 6 per cent of the group and if he were to come out in favour of a demerger, it would create a momentum that would be hard to resist.

McGrath is a canny operator. I remember him at the Diageo launch party, handing out drinks and wearing a sailor's hat at a jaunty angle. He would like to go out with a bang, not a whimper. The time for demerger may be upon us.


Britain hits the sack

I note that all those people who were moaning about the strong pound are rather quiet now. When sterling dropped below $1.50 in midweek, it was clear the issue was not pound strength but euro weakness. When Ford decided to cut jobs in Dagenham and move work to Cologne, it emerged that sterling was less of an issue than the UK's more liberal employment laws, which made it easier to sack workers in Essex than in Nordhrein Westfalen. Those who want to keep Europe at arm's length might reflect on this.


Shock, horror - a profit!

Man the barricades. Head for the lifeboats. Call your broker. Chrysalis has made a profit.

The firm that could teach Lastminute, QXL and many a dot com about making losses, and whose capacity for red ink led to jokes that it was going to be reclassified from the media to the biotechnology sector, is now in the black for the first time in five years. (And that year of profit was a quirk of accounting after selling one of its businesses).

This year, on the back of its supposed new media exposure, Chrysalis shares have soared fourfold, valuing Chris Wright's disparate empire at over £350m. I'm willing to give most people the benefit of the doubt, but the QPR and racehorse-loving media mogul has tried my patience for too long. Now that Chrysalis is making profits, we will soon find how disappointing they will be.

* j.nisse@independent.co.uk