Diageo set to buy back shares

DIAGEO, the food and drink giant, yesterday said it was set to return money to shareholders via share buy-backs, as a way of using up the cash being produced by its United Distillers and Vintners (UDV) spirits arm, Reuters reports.

"Our spirits business is producing so much cash. We do not believe we can use that in a value-creation way, so we will look to return it to shareholders," John McGrath, Diageo's chief executive, said in an interview on the company's first anniversary.

He said Diageo had been ploughing as much investment as possible into UDV's top brands - including Johnnie Walker whisky, Smirnoff vodka and Gordon's gin - since the merger of the old spirits arms of Guinness and GrandMet.

With advance corporation tax (ACT) abolished next year, Mr McGrath said it was more advantageous to offer share buy-backs than simply bigger dividends, and these were likely.

He said Diageo had bought some shares back at the end of September when its share price was low, and he hinted this would be stepped up to soak up UDV's excess cash.

But Mr McGrath said the company still needed to demonstrate that UDV would grow faster than the competition and also faster than the two separate businesses could have done since the pounds 24bn Guinness-GrandMet merger.

This promise was made on the announcement of the merger in May 1997, and Mr McGrath said the company had yet to show the stock market that it had succeeded.

Diageo will go through its spirits brands country by country and is prepared to sell "tail-end" brands that do not produce an economic profit, he added.

Mr McGrath said the merger was driven by the creation of shareholder value and aimed at doubling it in the next four years. This meant that pounds 100 invested in shares should create pounds 200 if all dividend income was reinvested.

This kind of performance should give annual compound growth of around 20 per cent, with the market in general looking for 12-13 per cent growth in shareholder value, he said.

However, Mr McGrath said the benefits of the merger had been offset to some extent by the downturn in Asia and Latin America.