Diageo Says It Faces Redenomination Risk in Euro Exit Scenario

Diageo Plc, the drinkmaker that gets 5 percent of its sales from Greece, Italy, Portugal and Spain, said it’s mindful of the risk that a nation may leave the euro area and adopt a different currency.

“The ongoing sovereign debt crisis in certain countries in Europe has increased concerns that, were one or more countries to leave the euro, Diageo’s investment in any countries concerned could be impaired and may be subject to redenomination and other risks going forward,” the London-based company said in an earnings report today.

Euro-region policy makers are undertaking a week of shuttle diplomacy as they seek to defuse turmoil in the region that has roiled financial markets for almost three years. Greek Prime Minister Antonis Samaras told French newspaper Le Monde in an interview that speculation of a Greek exit must end. The probability of a country leaving the monetary union by the end of 2014 is 64 percent, based on bets made at Intrade.com.

“Every multinational or any business operating in the euro zone needs to consider those risks, just as we would,” Diageo’s Chief Financial Officer Deirdre Mahlan said today on a conference call. “We are watching carefully Spain and Italy, managing working capital, and working with strong banking partners.”

Diageo, which sells brands including Guinness stout and Smirnoff vodka, said today that revenue increased 6 percent on a so-called organic basis in the 12 months through June 30. Earnings increased 9 percent on the same basis, boosted by a recovery in demand in the U.S. and sales in emerging markets.

‘Adverse Effect’

Lower economic growth in Europe “could have a material adverse effect on Diageo’s business,” the company said in the earnings statement. The euro-region is forecast to contract 0.5 percent this year, according to analyst estimates compiled by Bloomberg.

Greece, Italy, Portugal and Spain, which are all in recessions, represent 5 percent of Diageo’s net sales globally, according to the statement.

“These southern European markets declined 6 percent in volume and 9 percent in net sales as deeper austerity measures put additional pressure on consumption and sales mix,” the company said.

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