British drinks group Diageo would make the perfect tipple for an activist investor. So far, nobody has taken a sip.
That's difficult to understand given all the attention on the beverage sector thanks to "Megabrew" (AB Inbev's $106 billion takeover of SABMiller).
First off, there's the share price. Diageo shares have fallen about 5 percent since Ivan Menezes became CEO in July 2013. That's far worse than the Stoxx Europe 600 Food and Beverage index, up about 30 percent during that time.
This reflects sales growth dented by China's anti-extravagance rules and changing drinking habits in the U.S., which accounts for 19 percent of Diageo's sales volume and 45 percent of operating profit.
U.S. millennials (consumers born after 1980) are shifting from mass-market vodka brands to independent producers and whiskies. And not Scotch whisky -- of which Diageo is the world's biggest distiller -- but Irish, American and Japanese brands. According to preliminary estimates from researcher Euromonitor, whisky overtook vodka as the world's favorite spirit last year, and will retain that title at least through to the end of the decade.
Menezes has tried to stem the decline by parachuting in highly-regarded finance director Deirdre Mahlan to run the North American arm. He's launched a $50 million marketing campaign dubbed "Activation Army" to host nationwide tastings. But that's the type of enforced fun that sits uneasily with hipsters' desire for individuality.
The CEO's also been tidying up the portfolio, selling the Gleneagles golf resort and most of Diageo's U.S. and U.K. wine assets. An asset swap with Heineken handed its rival rights to Jamaica's Red Stripe beer.
But there's one asset Menezes is reluctant to part with: Guinness. As Nigerians drink more Guinness than the Irish, the rationale for keeping it is that it will be a gateway into Africa for spirit brands such as Smirnoff.
An activist is more likely to be swayed by the valuation, with Diageo's beer business, primarily Guinness, worth 7.4 billion pounds ($9.7 billion), according to Bernstein. As Brooke Sutherland has argued, Diageo would be wise to exit Guinness and focus on spirits.
It would cost an activist about 5 billion pounds for a 10 percent stake in Diageo, putting it ahead of the mostly blue-chip top-10 holders. Value funds can often force through change with far smaller stakes than that. Diageo shares aren't cheap, at about 20 times the next 12 months' earnings, but they've tended to trade at a discount to global peers.
As well as the cash from a Guinness disposal, another prize for an effective activist would be restoring some allure to Diageo's spirits brands.
As the chart below shows, Diageo's organic growth has usually trailed Pernod Ricard's over the past eight years, according to Bloomberg Intelligence. More inspiring products, particularly appealing to younger drinkers, could narrow the gap. Worryingly in the first half, Diageo's marketing spend fell 5 percent.
Menezes has at least stabilized things. Organic sales rose 1.8 percent in its first half (the six months to December), after a 1.5 percent first-quarter decline.
But Diageo is still performing worse than the broader U.S. spirits market, and some investors are frustrated by his performance. His attachment to Guinness means he and an activist would probably not see eye-to-eye.
Menezes promises more progress in the second half, with expectations of the U.S. returning to slight growth, as well as margin expansion and decent cash flows. An investor with a deeper thirst for change might be able to hurry things along.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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