Zacks_Analysts' Blog : Diageo Gets Permit to Enter China - Analyst Blog

The world’s largest spirits group, Diageo Plc. (DEO), got approval of the Chinese authorities to increase its stake in the Quanxing Group, a Chinese white spirits group based in Sichuan Province, taking its share to 53 per cent.

On being the majority shareholder of Quanxing Group (which is 40% holder of Sichuan Swellfun Co.) Diageo gets the indirect control of Shuijingfang, the signature brand of Sichuan Swellfun.

Shuijingfang is a famous brand of baijiu, a fiery spirit, which boasts being China’s oldest and uses distilling techniques that dates back to the 14th century.

Baijiu that accounts for 32% of China's alcoholic drinks market, reported 13% higher sales from the previous year, is about 45 times bigger than the Chinese market for whisky.

Upon completion of the deal, Diageo would be required to launch a tender offer for the remaining 60.3% of Sichuan Swellfun, potentially giving it direct majority ownership of the Shanghai-listed spirits maker. The company will need to pay nearly $1 billion if all the shareholders agree to the offer.

The approval came reasonably late after the spirit giant had proposed to buy 4% of the group in March 2011. It has been granted the approval after months of intensive lobbying by the British government.

Western governments (West) has been coaxing Beijing for long to open up their economy to foreign investment, and the Diageo deal marks the first time that a foreign company has gained control of an important Chinese brand.

The Diageo deal gained additional significance after China's regulators shocked global investors in 2009 by blocking Coca-Cola’s attempt to seal a $2.4 billion takeover of Huiyuan Juice, one of China's best-known soft drinks makers.

In December 2006, Diageo entered China's liquor market by purchasing a 43 percent share in Quanxing from Chengdu Yingsheng, and boosted its stake to 49 percent in July 2008. The additional 4% share transfer comes as a landmark move, as industry experts expect the takeover to help Chinese white spirits gain an international recognition.

The recent economic downturn deterred Diageo and the stiff competition faced from Pernod Ricard and Fortune Brands Inc. (FO) in the spirits business and Anheuser-Busch InBev (BUD) and Molson Coors Brewing Company (TAP) in the beer business throw shadow on its value in the eyes of the investors.

Diageo holds a Zacks #4 Rank, which translates into a short-term Sell rating.