Diageo's drinks are best left on the shelf

Abbey National; Informa  
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Diageo finally got the opportunity to put its vast drinks cabinet to good use with news that the US had okayed its $8.15bn (£5.5bn) joint purchase of the Seagram drinks portfolio – give or take a bottle of rum or two.

The deal confirms Diageo as a giant of the booze world and marks the final chapter of its restructuring. It follows the eventual disposal of Pillsbury, of dough boy fame, in October.

All that remains is the small matter of the epilogue, otherwise known as Burger King. Diageo is widely expected to centre the plot on a management-led leveraged buyout, starring John Dasburg, the group's newish boss, as the main protagonist with support from the Texas Pacific, the US private equity group.

Such a move would leave Diageo as a pure drinks play and free to get on with driving cost savings from the Seagram deal.

Other Seagram pluses are more North American distribution clout and a boost to margins from having a higher sales value per case. All in all, analysts expect bumper profits from Diageo for the next couple of years with earnings growth in double digits.

However, as if to spice things up, Diageo could still lose ownership of Captain Morgan – the jewel of the Seagram bounty – should a Puerto Rico court case go the wrong way. Especially as it is seeking a buyer for its Malibu coconut rum brand, worth up to £750m, as a pre-condition for FTC approval.

Current trading is good. US slowdown aside, the top line grew at 7 per cent from July to October, matching last year. Smirnoff Ice, the ready-to-drink vodka mix, helped to drive sales. There was better news too at Burger King. US sales grew 1 per cent in the four months, although worldwide sales were flat.

Most of the plus-points are already priced into the shares, up 3 per cent to 765.5p. They trade on a mighty forward price/earnings ratio of 18 times, and until Diageo delivers some of its growth potential the shares are best left on the shelf.

Abbey National

Investors have been losing the Abbey habit lately, and it's not hard to see why. Abbey National's management was already unpopular with the City in January and a host of boardroom boo-boos has made matters worse.

A year ago, the mortgage bank's chief executive, Ian Harley, refused to enter talks with Lloyds TSB about a takeover that would have delivered a fat premium for Abbey's shareholders. The Competition Commission blocked the deal, but the suspicion is that it might have backed a merger had Abbey taken a more co-operative stance towards Lloyds.

More recently, there has been a succession of revelations about bad debts in its wholesale banking operations, which specialise in corporate bonds and loans. Last month the unit disclosed a £100m hit relating to the collapse of the US energy trader Enron. Coming after the shock departure of the unit's chief executive and a surprise hike in bad debt provisions, the disclosure has severely undermined confidence in the stock.

Meanwhile, intensifying competition in the mortgage market will continue to depress margins in the retail arm. Analysts see Abbey's overall earnings growth averaging no more than 7.8 per cent over the next five years, 1.3 percentage points below the sector average.

It all sounds like an uninspiring investment proposition. That is unless you happen to be the banking team at Commerzbank. In a recent circular, Commerzbank has urged investors to focus on Abbey's rock-bottom valuation rather than its operational weaknesses. Abbey may not be growing as fast as its six main rivals, but its forward price-earnings ratio for 2001, at 10.6, is well below the sector's 15.6. In 2002, the p/e falls to 9.6, against a sector's 13.1.

Commerzbank values the shares at 1,250p. With the stock closing yesterday at 957.5p, that leaves plenty of upside for investors willing to back that contrarian view.

Informa

Informa, the specialist publisher and exhibitions group, has had a truly appalling 18 months. Dragged down by the implosion in telecoms, where it has several publications and conferences, and the advertising decline, the shares sank from 830p in the middle of last year to a low of 127.5p in the Autumn. As the publisher of Lloyd's List Informa's management must have thought the plunge was worth a ringing of the Lutine Bell.

But there now appears to be some light in the gloom. The shares have been rising gradually in the past few months and picked up another 18p to 251.5p on yesterday's statement ahead of the 31 December year end.

One of Informa's strengths is that it is focused on niche markets in pharmaceuticals, insurance and the maritime sector. As such it is insulated from the worst ravages of the downturn.

The nadir for Informa came in early November when its flagship UMTS telecoms event in Barcelona took only half the revenues expected because only 600 delegates turned up as opposed to the 2,500 last year.

Yesterday the company said it had seen "some improvement" in delegate attendances as fear of flying abated. The company reiterated that the decline in delegate numbers would be mitigated by strong sponsorship and exhibitions sales. It has also cut costs with a 10 per cent reduction in staff numbers at a cost of £4.5m.

Advertising, which accounts for 11 per cent of turnover, remained depressed in November and December. But advertising in the life sciences area, which accounts for a quarter of revenues, has remained buoyant.

On unchanged analysts forecasts of £32m for the year just ending the shares trade on a forward p/e of 14. A decent recovery play.

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