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Investment Proposal
Diageo plc (DEO)
October 30, 2014
Executive Summary
Diageo’s robust product portfolio and strong fundamentals make the alcohol producer a highly attractive
addition to GIMG’s portfolio.
Diageo plc is the world’s leading premium drinks business
with a highly developed collection of brands across all parts
of the alcohol spectrum with a presence in beer, wine, and
spirits. Leading products include Guinness, Johnny Walker
and Ketel One.
Diageo is based in London and is well established in North
America and Western Europe. The company’s focus on spirits
allows them to take advantage of the current shift from beer
to spirits occurring in these regions. Diageo has also been
able to successfully utilize its robust product portfolio to
access emerging markets in both Africa and Asia.
Our target price for DEO is $134.00 based on discounted
cash flow and comparables analysis. We believe the company
is currently undervalued at $115.97. We believe this
discrepancy is primarily driven by a market overreaction in
response to lackluster FY2014 sales. Despite last years
results it is clear that Diageo remains poised to take
advantage of growing global demand for spirits.
1
Table of Contents
I. Executive Summary
II. Introductioni. In the News
ii. Industry Overview
iii. Global Beer Market
iv. Global Wine Market
v. Global Spirits Market
vi. Industry Distribution
III. Company Summaryi. Timeline
ii. Company Overview
iii. Diageo ADR Trading Overview
iv. Geographic Mix
v. Key Products
IV. Valuationi. Trading Comparables
ii. Transaction Comparables
iii. Discounted Cash Flow Analysis
iv. Valuation Ranges (Football Field)
V. Recommendationi. Merits & Risks
ii. Conclusion
2
Introduction
In the News
4
Diageo Pours New Tech into Liquor Venture
“The world’s No. 1 spirits maker is looking for new ways to use technology to boost its
drinks business … from smartphone connectivity to wearable personal technology.”
Wall Street Journal - September 8, 2014
Diageo Aiming to Recover the Whiskey Market in China
“Diageo’s strategy in counteracting the decline in Baijiu is to introduce lower-priced
versions, aimed more at private dinners and large family occasions than previously
lavish state and local government banquets.”
Financial Times - October 16, 2014
Diageo is Targeting the African Markets with Spirits and Beer
“The market in Nigeria, the continent’s most populous nation, will probably more
than double over the same period. Growth will be driven by a large, young
population and increasing urbanization that will demand branded consumer goods”
Bloomberg - September 30, 2014
Beverage Industry
Source: Bloomberg, Capital IQ, Euromonitor, Reportlinker
5
Sector Breakdown
Global Market Size
Packaged Water
Bulk Water
Tea
Milk & Milk Drinks
Juice & Juice Drinks
Iced Tea
Carbonated Drinks
Coffee
Other
$
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
2000
2011A 2012A 2013A 2014E 2015E
Glo
bal
Rev
enue (
$ b
illio
ns)
Index Performance
DJUSBV
S&P 500
-20%
0%
20%
40%
60%
80%
100%
Global Beer Market
Source: Capital IQ, Euromonitor
6
400
450
500
550
600
650
700
750
800
2011A 2012A 2013A 2014E 2015E
Glo
bal
Rev
enue (
$ m
illio
ns)
Preferences in North America shifting from beer
to spirits
Increasing competition from smaller craft beer
producers in North America and Western Europe
Sub-premium beer on the decline while above-
premium gains slightly
Major beer brands continue to make headway in
West Africa
Major Players
Growth Drivers Global Sales
Global Wine Market
Source: Capital IQ, Duke, Euromonitor
7
20
22
24
26
28
30
32
34
2011A 2012A 2013A 2014E 2015E
Glo
bal
Rev
enue (
$ m
illio
ns)
Highly fragmented market led by the “Big Three”
wine producers
New World wine production now rivals the
prestige and tradition associated with Old World
producers of Europe
North America is the fastest growing consumer
market for wine sales
Major Players
Growth Drivers Global Sales
Global Spirits Market
Source: Capital IQ, Euromonitor
8
300
350
400
450
500
550
2011A 2012A 2013A 2014E 2015E
Glo
bal
Rev
enue (
$ m
illio
ns)
Preferences in North America shifting from beer
to spirits
High levels of consolidation across product
categories and price points
Vodka remains fastest growing spirits category
Whiskey is making consistent gains in India and
East Asia
Major Players
Growth Drivers Global Sales
Industry Distribution
Source: Capital IQ
9
More
Spir
its
Less
Spir
its
Less Beer More Beer
Company Information
Timeline of Major Events
Source: Company Website, New York Times, Wall Street Journal
11
December 1997
Founded from merger of
Guinness and Grand
Metropolitan
December 2000
Acquired additional wine
and spirits brands from
Seagram
July 2002
Exits food industry to focus
exclusively on premium
beverage alcohol
February 2008
Abandons Absolut plans in
favor of Ketel One deal
March 2010
Becomes majority
shareholder in Chinese
white spirits company
February 2011
Buys Turkish liquor company
maker Mey Içki in $2.1
billion deal
June 2012
Decides to invest more than
$1.54 billion in scotch
whiskey production
November 2012
Buys control of India’s
biggest liquor company,
United Spirits
Company Overview
Source: Company Filings, Bloomberg
12
Company Summary Financial Performance
5-Year Trading Overview
900
1100
1300
1500
1700
1900
2100
2300
Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14
Product Mix
Spirits
Beer
Ready-to-Drink
Wine
Headquarters London, UK
Founded December 1997
Industry Food & Beverage
Sub-Industry Wineries & Distilleries
Employees 28,000 as of 2014
Description Diageo plc produces and distributes
a variety of premium alcoholic
beverages around the world.
2010A 2011A 2012A 2013A 2014A
Revenue £9,780.0 £9,936.0 £10,762.0 £11,303.0 £10,258.0
Gross Margin 58.1% 59.6% 60.4% 60.9% 60.7%
EBITDA Margin 30.1% 32.6% 33.5% 33.4% 36.6%
EBIT Margin 26.3% 29.0% 29.7% 29.9% 30.4%
Net Income 1,629.0 1,900.0 1,942.0 2,452.0 2,248.0
Shares Outstanding (millions) 2,486.0 2,493.0 2,495.0 2,502.0 2,506.0
EPS 0.66 0.76 0.78 0.98 0.90
(all figures in millions GBP except per share data)
Diageo ADR Trading Overview
DEO
DJUSBEV
S&P 500
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14
Source: Company Website, CNBC, Bloomberg, Reuters
13
Current Price $115.97
50-Day MA 116.36
52-Week High 133.00
52-Week Low 108.20
Dividend Yield 2.10%
Key Statistics October 14, 2014
Johnny Walker and Smirnoff
named two of Interbrand’s
“Best Global Brands”
September 30, 2014
Chinese sales decline
is less than analyst
expectations
January 30, 2014
FY2014 Semi-Annual
Report; trailing estimates
due to sales declines in
China
July 30, 2014
FY2014 Annual
Report; trailing
estimates slightlyApril 15, 2014
Offers $1.9 billion in 2nd
bid to control United Spirits
May 29, 2014
Announces plans for new
distillery in Kentucky
Volume
Geographic Mix
Source: Company Filings
14
Net Sales Operating Profit
£
North America Western Europe
Africa, Eastern
Europe & Turkey
Latin America &
Caribbean Asia Pacific
Financials by Region
Volume 49 33 36 23 14
Net Sales 3,444 2,169 2,075 1,144 1,347
Operating Profit 1,460 939 554 328 283
% Share by Region
Volume 32 21 23 15 9
Net Sales 34 21 21 11 13
Operating Profit 45 19 17 10 9
Scotch Whiskey Other Whiskey Vodka Rum Beer Wine
Ultra Premium
Super Premium
Premium
Standard
Value
Key Products
Source: Company Filings
15
Valuation
Trading Comparables
Source: Bloomberg, FactSet
17
Revenue £13,980
EBIT 3,108
EBITDA 3,750
Net Income 2,181
Net Debt 9,570
Minority Interest 767
Shares Outstanding 2,513
GBP to USD 1.5997
US ADR Ratio 4:1
Financial Information EV / EBITDA P / E
Mean 15.8x 21.4x
Low 13.1x 17.5x
High 20.7x 26.7x
Mean £19.52 £18.59
Low 15.49 15.21
High 26.82 23.20
Mean $124.92 $118.92
Low 99.09 97.31
High 171.63 148.47
Diageo Valuation
Multiple
Implied Price / Share [DGE]
Implied Price / Share [DEO]
Company Name Ticker Exchange Share Price LTM 2015E LTM 2015E LTM 2015E LTM 2015E
Constellation Brands STZ NYSE 89.17 169.5 17,196.4 24,284.0 5,858.5 6,313.1 1,679.5 1,932.5 14.5x 12.6x 19.6x 15.8x
Brown Forman BF-B NYSE 90.47 129.0 19,182.4 19,733.4 3,012.0 3,385.5 1,017.0 1,202.1 19.4x 16.4x 17.5x 14.8x
Pernod Ricard RI EPA 114.49 265.4 30,388.6 42,090.7 10,774.7 11,128.2 3,204.6 3,265.4 13.1x 12.9x 22.1x 16.6x
SAB Miller SAB LON 56.04 1,613.1 90,391.6 106,379.6 16,704.0 26,910.7 5,131.0 7,414.9 20.7x 14.3x 26.7x 20.2x
AB In Bev BUD NYSE 109.92 1,608.2 178,486.6 230,010.6 46,308.1 50,283.0 17,132.3 20,554.4 13.4x 11.2x 19.6x 18.6x
Ambev ABEV NYSE 6.44 15,709.1 100,816.4 99,517.5 16,153.3 16,856.5 7,168.1 8,263.8 13.9x 12.0x 23.0x 18.2x
Median 60,390.1 70,804.1 13,464.0 13,992.4 4,167.8 5,340.2 14.2x 12.7x 20.8x 17.4x
Mean 72,743.7 87,002.6 16,468.4 19,146.2 5,888.8 7,105.5 15.8x 13.2x 21.4x 17.4x
Min 17,196.4 19,733.4 3,012.0 3,385.5 1,017.0 1,202.1 13.1x 11.2x 17.5x 14.8x
Max 178,486.6 230,010.6 46,308.1 50,283.0 17,132.3 20,554.4 20.7x 16.4x 26.7x 20.2x
Enterprise
ValueEquity Value
Shares
Outstanding
P / EEPS EBITDA EV / EBITDA
Transaction Comparables
Source: Bloomberg, FactSet
18
TV / EBITDA TV / EBIT
Mean 20.3x 23.4x
Low 14.8x 19.2x
High 25.8x 27.6x
Mean £19.62 £18.64
Low 13.43 14.76
High 25.82 22.51
Mean $125.56 $119.26
Low 85.91 94.47
High 165.20 144.05
Implied Price / Share [DEO]
Implied Price / Share [DGE]
Multiple
Diageo Valuation
Revenue £13,980
EBIT 3,108
EBITDA 3,750
Net Income 2,181
Net Debt 9,570
Minority Interest 767
Shares Outstanding 2,513
GBP to USD 1.5997
US ADR Ratio 4:1
Financial Information
Date Aquirer Target
Purchase
Consideration
Equity
Value
Transaction
Value
Enterprise
Value
TV /
EBITDA
TV /
EBIT Premium
Percent
Aquiring
1/13/2014 Suntory Holdings Beam Inc Cash 13,843.1 15,603.2 15,603.2 22.5x 27.3x 24.68% 100.0%
6/29/2012 Anheiser Busch Grupo Modelo SAB de CV Cash 38,572.0 33,483.4 72,599.0 17.0x 20.1x 6.30% 49.7%
6/18/2012 King Holdings Co., Ltd. Little World Beverages Ltd. Cash 363.48 387.93 594.36 26.8x 26.8x 39.84% 63.8%
4/30/2010 William Grant & Sons Holdings Ltd. Spirits and Liqueurs Divison of C&C Group plc Cash 397.30 397.30 397.30 18.6x 18.6x N/A 100.0%
1/11/2010 Heineken NV FEMSA Cerveza SA Stock 7,592.50 9,629.50 7,592.50 12.2x 19.8x N/A 100.0%
Median 7,592.5 9,629.5 7,592.5 18.6x 20.1x - 100.0%
Mean 12,153.7 11,900.3 19,357.3 19.4x 22.5x - 82.7%
Minimum 363.5 387.9 397.3 12.2x 18.6x - 49.7%
Maximum 38,572.0 33,483.4 72,599.0 26.8x 27.3x - 100.0%
Adjusted Mean - - - 20.3x 23.4x - -
Adjusted Low - - - 14.8x 19.2x - -
Adjusted High - - - 25.8x 27.6x - -
Discounted Cash Flow Analysis
Source: Bloomberg, Capital IQ, Company Filings, FactSet
19
Historical
2014 2015 2016 2017 2018 2019
Net Sales - £10,795.5 £11,281.8 £11,754.4 £12,126.8 £12,436.9
- 3,535.0 3,712.6 3,873.7 3,988.0 4,114.6
- 3,024.3 3,148.6 3,248.6 3,370.5 3,453.7
- 2,396.8 2,518.9 2,598.9 2,696.4 2,763.0
- 510.7 564.0 625.1 617.4 660.9
- (645.8) (649.5) (653.3) (657.1) (660.9)
- (125.2) (313.7) (283.8) (218.0) (167.0)
- 2,136.5 2,119.6 2,286.8 2,438.7 2,596.0
- 2,031.1 1,915.6 1,964.8 1,991.9 57,459.6 Terminal Value: 71,405.1
65,363.0 Terminal Growth: 1.50%
9,570.0 WACC: 5.19%
767.0 Shares Outstanding: 2,513.2
0.0 FX Rate: 1.5997
55,026.0
£21.9
$140.1
2,031.1 1,915.6 1,964.8 1,991.9 52,494.5 Terminal Value: 65,010.6
60,397.9 Terminal Multiple: 15.8x
9,570.0 WACC: 5.19%
767.0 Shares Outstanding: 2,513.2
0.0 FX Rate: 1.5997
50,060.9
£19.9
$127.5
Earnings before Interest and Taxes (EBITDA)
Exit Multiple
Method
Discounted FCF
Enterprise Value
Net Debt
Minority Interest
Preferred Stock
Equity Value
Equity Value / Share
US 4:1 ADR
Minority Interest
Preferred Stock
Equity Value
Equity Value / Share
+ Depreciation & Amortization
Perpetuity
Method
US 4:1 ADR
Projected
Earnings before Interest and Taxes (EBIT)
Earnings before Interest After Taxes (EBIAT)
- Capital Expenditures
- Increases in Net Working Capital (NWC)
Free Cash Flow (FCF)
Discounted FCF
Enterprise Value
Net Debt
$127.5 14.8x 15.3x 15.8x 16.3x 16.8x
4.69% 122.59 126.76 130.92 135.09 139.25
4.94% 120.95 125.06 129.18 133.30 137.41
5.19% 119.33 123.39 127.46 131.53 135.59
5.44% 117.73 121.75 125.76 129.78 133.80
5.69% 116.15 120.12 124.09 128.06 132.04
Terminal Multiple
WA
CC
$140.1 1.40% 1.45% 1.50% 1.55% 1.60%
4.69% 161.29 163.87 166.53 169.28 172.11
4.94% 147.88 150.08 152.35 154.69 157.10
5.19% 136.24 138.15 140.10 142.11 144.18
5.44% 126.05 127.71 129.41 131.15 132.94
5.69% 117.04 118.50 119.99 121.51 123.08
Terminal Growth Rate
WA
CC
Valuation Ranges (Football Field)
Source: Bloomberg
20
$99.09
$94.47
$85.91
$116.15
$117.04
$108.20
$97.31 $148.47
$171.63
$144.05
$165.20
$172.11
$157.10
$133.00
$115.97 $134.00
Current Target
Recommendation
Merits & Risks
Diageo maintains a global presence with a highly diversified product portfolio. However, this also exposes them
to a variety of risks stemming from diverse international markets.
Merits
Diageo holds a diversified product portfolio that
includes many recognizable, high-end brands
An ability to innovate around established brands
(examples include Bailey’s Chocolate Luxe &
Smirnoff Confectionary flavors)
A focus in spirits limits the Diageo’s exposure to
the more fragmented beer and wine industries
Can take advantage of North American preference
shift from beer to spirits
Maintains a steady level of maturing inventories
through growth cycles. These inventories are
major assets and can increase future profits as the
margins on these products are often much higher
Risks
Possible weakening demand in established North
American and Western European markets
Growing influence of indigenous brands in
emerging markets
Erosion of leading beer brands by smaller craft
producers
Continued declines in China due to crackdowns
on extravagant spending
Negative sentiment regarding alcohol consumption
in some markets may slow growth
Source: Capital IQ, Company Filings
22
Conclusion
Source: Capital IQ, Demeter Group, Reuters
23
Strong presence across categories and price points gives Diageo multiple points of entry
into new markets
Vodka remains the fastest growing spirit with Diageo’s Smirnoff leading the category
(approximately twice the size of the 2nd largest brand)
Controls approximately 25% of total global whiskey market
Beer brands like Guinness and Red Stripe are resistant to significant erosion by craft
producers
Strong
Positioning
Global
Presence
Experienced
Management
An established presence in North America and Western Europe affords Diageo a
measure of stability
The company’s renewed focus on emerging markets will allow the company to access
higher growth opportunities
Strategic acquisitions of established indigenous brands used to open up new markets
and market segments
Ivan Menezes, Indian-born former COO and head of US operations for eight years,
brought in to focus on lucrative emerging markets
Operates as 21 geographically based offices, each with their own highly experienced
management teams
Skilled at adapting established local spirits businesses to distribute branded products
with minimal disruption
Disclaimer: These materials have been prepared by the Goizueta Investment Management Group. This document is for information and illustrative purposes only and does
not purport to show actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
Opinions expressed herein are current opinions as of the date appearing in this material only and are subject to change without notice. Reasonable people may disagree
about the opinions expressed herein. In the event any of the assumptions used herein do not prove to be true, results are likely to vary substantially. All investments entail
risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a
long term especially during periods of a market downturn. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses,
or results similar to those discussed, if any. No part of this document may be reproduced in any manner, in whole or in part, without the prior written permission of the
Goizueta Investment Management Group, other than to your employees. This information is provided with the understanding that with respect to the material provided
herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is
appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. The Goizueta Investment
Management Group does not purport to and does not, in any fashion, provide broker/dealer, consulting or any related services. You may not rely on the statements
contained herein. The Goizueta Investment Management Group shall not have any liability for any damages of any kind whatsoever relating to this material. You should
consult your advisors with respect to these areas. By accepting this material, you acknowledge, understand and accept the foregoing. © 2014 Goizueta Investment
Management Group. All Rights Reserved.
Appendices
Appendix A: Pro Forma Income Statement
Source: Company Filings1 Projected revenue growth of 4.82% in 2015 projected on an adjusted straight line basis down to 2.56% in 20192 Reflects the effects of the Nuvo disposal in FY2013 and additional investments in USL in FY20143 Share of after tax results of associates and joint ventures projected forward using a weighted moving average of historical results
26
(in millions GBP) 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E
Sales1
£14,392.0 £15,276.0 £13,980.0 £14,653.8 £15,318.8 £15,970.8 £16,470.4 £16,892.7
Excise duties 3,753.0 3,973.0 3,722.0 3,858.3 4,037.1 4,216.4 4,343.6 4,455.8
Net Sales 10,639.0 11,303.0 10,258.0 10,795.5 11,281.8 11,754.4 12,126.8 12,436.9
Cost of Sales 4,208.0 4,416.0 4,029.0 4,239.4 4,426.0 4,613.8 4,759.7 4,881.0
Gross Profit 6,431.0 6,887.0 6,229.0 6,556.2 6,855.8 7,140.6 7,367.1 7,555.8
Marketing 1,671.0 1,769.0 1,620.0 1,698.4 1,775.1 1,850.8 1,908.7 1,957.6
Other operating expenses 1,652.0 1,738.0 1,902.0 1,833.4 1,932.1 2,041.2 2,087.9 2,144.5
Operating profit (EBIT) 3,108.0 3,380.0 2,707.0 3,024.3 3,148.6 3,248.6 3,370.5 3,453.7
Non-operating items2
147.0 (83.0) 140.0 - - - - -
Finance income 268.0 259.0 241.0 251.8 250.0 248.7 249.7 249.5
Finance charges 709.0 716.0 629.0 (512.5) (525.9) (515.0) (509.5) (505.6)
229.0 217.0 252.0 236.9 237.5 240.2 238.7 238.9
Profit before taxation (EBT) 3,043.0 3,057.0 2,711.0 4,025.6 4,161.9 4,252.6 4,368.5 4,447.7
Taxation 1,011.0 507.0 447.0 590.5 599.9 623.0 641.2 658.5
Profit from continuing operations 2,032.0 2,550.0 2,264.0 3,435.1 3,562.0 3,629.6 3,727.3 3,789.2
Discontinued operations (11.0) - (83.0) - - - - -
Net Income 2,021.0 2,550.0 2,181.0 3,435.1 3,562.0 3,629.6 3,727.3 3,789.2
Share of after tax results of associates and joint ventures3
Appendix B: Pro Forma Statement of Cash Flows
Source: Company Filings1 Dividends received projected forward using a weighted moving average of historical results
27
(in millions GBP) 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E
Cash flows from operating activities
Profit for the year £2,021.0 £2,550.0 £2,181.0 £3,435.1 £3,562.0 £3,629.6 £3,727.3 £3,789.2
Discontinued operations 11.0 - 83.0 - - - - -
Taxation 1,011.0 507.0 447.0 590.5 599.9 623.0 641.2 658.5
Share of after tax results of associates and joint ventures (229.0) (217.0) (252.0) (236.9) (237.5) (240.2) (238.7) (238.9)
Net finance charges 441.0 457.0 388.0 (764.3) (775.9) (763.8) (759.2) (755.1)
Non-operating items (147.0) 83.0 (140.0) - - - - -
Operating profit 3,108.0 3,380.0 2,707.0 3,024.3 3,148.6 3,248.6 3,370.5 3,453.7
Increase in inventories (336.0) (268.0) (229.0) 23.1 48.7 32.0 36.2 27.3
Increase in trade and other recievables (211.0) (350.0) (276.0) (52.4) 143.1 122.8 85.5 57.3
(Decrease)/Increase in trade and other payables and provisions 26.0 66.0 (92.0) 154.5 121.8 129.0 96.4 82.3
Net increase in working capital (521.0) (552.0) (597.0) 125.2 313.7 283.8 218.0 167.0
Depreciation, amortization and impairment 407.0 398.0 629.0 510.7 564.0 625.1 617.4 660.9
Dividends received1
190.0 220.0 228.0 218.0 221.4 221.7 220.9 221.2
Post employment payments less amounts included in operating profit (188.0) (487.0) (196.0) (281.7) (297.1) (272.2) (281.6) (281.9)
Other items (1.0) 45.0 (80.0) - - - - -
Other items total 408.0 176.0 581.0 447.0 488.4 574.5 556.7 600.2
Cash generated from operations 2,995.0 3,004.0 2,691.0 3,596.5 3,950.6 4,107.0 4,145.3 4,220.9
Appendix B: Pro Forma Statement of Cash Flows
Source: Company Filings2 Equity dividends paid at an average 3/5 ratio
28
Cash flows from investing activities
Disposal of property, plant and equipment and computer software 39.0 39.0 80.0 59.5 61.6 64.6 62.7 63.0
Purchase of property, plant and equipment and computer software (477.0) (636.0) (642.0) (645.8) (649.5) (653.3) (657.1) (660.9)
Movements in loans and other investments (1.0) 16.0 7.0 8.1 9.4 8.5 8.7 8.8
Sale of businesses 51.0 (16.0) 2.0 6.4 0.6 2.6 2.8 2.3
Acquisition of businesses (1,420.0) (644.0) (536.0) (745.2) (662.2) (661.9) (678.6) (670.3)
Net cash outflow from financing activities (1,808.0) (1,241.0) (1,089.0) (1,317.0) (1,240.2) (1,239.4) (1,261.6) (1,257.1)
Cash flows from financing activities
Proceeds from issue of share capital 1.0 - 1.0 - - - - -
Net purchase of own shares for share schemes - (11.0) (113.0) (59.8) (66.0) (73.5) (68.5) (69.5)
Dividends paid to non-controlling interests (101.0) (100.0) (88.0) (94.2) (93.5) (92.6) (93.2) (93.1)
Proceeds from non-controlling interests 11.0 - - - - - - -
Purchase of shares of non-controlling interests (155.0) (200.0) (37.0) (81.4) (84.4) (79.0) (80.3) (80.5)
Proceeds from bonds 1,548.0 2,100.0 1,378.0 1,717.8 1,692.3 1,637.1 1,669.8 1,664.5
Repayment of bonds (1,171.0) (869.0) (1,471.0) (1,110.0) (1,146.0) (1,232.7) (1,169.9) (1,181.6)
Net movements on other borrowings 115.0 7.0 (64.0) 19.3 19.3 19.3 19.3 19.3
Equity dividends paid (1,036.0) (1,125.0) (1,228.0) (1,717.6) (1,959.1) (2,177.8) (2,422.7) (2,652.4)
Net cash outflow from financing activities (788.0) (198.0) (1,622.0) (1,325.8) (1,637.3) (1,999.2) (2,145.6) (2,393.3)
Net (decrease)/increase in net cash and cash equivalents (500.0) 594.0 (921.0) 145.3 241.0 21.0 (116.3) (295.9)
Exchange differences (27.0) 36.0 (192.0) - - - - -
Net cash and cash equivalents at beginning of the year 1,542.0 1,015.0 1,645.0 532.0 677.3 918.3 939.3 823.0
Net cash and cash equivalents at the end of the year 1,015.0 1,645.0 532.0 677.3 918.3 939.3 823.0 527.1
Net cash equivalents consist of:
Cash and cash equivalents 1,047.0 1,750.0 622.0 677.3 918.3 939.3 823.0 527.1
Bank overdrafts (32.0) (105.0) (90.0) 0.0 0.0 0.0 0.0 0.0
(in millions GBP) 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E
Appendix C: Inventories
Source: Company Filings1 Inventories included in working capital includes all inventories except maturing inventories
29
(in millions GBP) 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E
To be used after greater than one year
Raw materials and consumables - £50.0 £84.0 £97.2 £101.8 £105.8 £109.3 £112.1
Maturing Inventories - 2,668.0 2,635.0 2,527.1 2,541.7 2,659.1 2,774.4 2,870.3
Total non-current inventories - 2,718.0 2,719.0 2,624.3 2,643.5 2,764.9 2,883.7 2,982.4
To be used during this year
Raw materials and consumables - 296.0 222.0 226.9 237.6 247.0 255.0 261.5
Work in progress - 63.0 59.0 58.9 61.9 63.9 66.1 67.8
Maturing inventories - 514.0 665.0 631.8 635.4 664.8 693.6 717.6
Finished goods and goods for resale - 616.0 557.0 562.2 592.5 609.2 631.6 647.9
Total current inventories - 1,489.0 1,503.0 1,479.7 1,527.5 1,584.8 1,646.3 1,694.8
Total inventories
Raw materials and consumables - 346.0 306.0 324.1 339.4 352.8 364.2 373.6
Work in progress - 63.0 59.0 58.9 61.9 63.9 66.1 67.8
Maturing inventories - 3,182.0 3,300.0 3,158.9 3,177.1 3,323.9 3,468.0 3,587.9
Finished goods and goods for resale - 616.0 557.0 562.2 592.5 609.2 631.6 647.9
Total inventories - 4,207.0 4,222.0 4,104.0 4,170.9 4,349.7 4,530.0 4,677.2
Inventories included in working capital1
- 1,025.0 922.0 945.1 993.9 1,025.8 1,062.0 1,089.3
Appendix D: Finance Income
Source: Company Filings
30
(in millions GBP) 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E
Interest income £107.0 £99.0 £109.0 £105.6 £105.3 £106.1 £105.8 £105.8
Fair value gain on interest rate instruments 155.0 155.0 115.0 £135.0 £133.0 £130.0 £131.9 £131.6
Total interest income 262.0 254.0 224.0 240.6 238.3 236.1 237.7 237.3
Interest charge on bank loans and overdrafts (22.0) (28.0) (40.0) (32.8) (34.0) (34.8) (34.2) (34.3)
Interest charge on finance leases (12.0) (20.0) (20.0) (18.4) (19.2) (19.1) (19.0) (19.1)
Interest charge on all other borrowings (459.0) (454.0) (395.0) (253.1) (267.9) (260.2) (253.1) (249.4)
Fair value loss on interest rate instruments (151.0) (151.0) (117.0) (130.6) (128.6) (128.0) (128.4) (128.3)
Total interest charges (644.0) (653.0) (572.0) (434.9) (449.6) (442.2) (434.7) (431.1)
Net interest charges (382.0) (399.0) (348.0) (194.3) (211.3) (206.1) (197.0) (193.8)
Net finance income in respect of post employment plans in surplus 5.0 0.0 17.0 9.5 9.9 11.2 10.4 10.5
Other finance income 1.0 5.0 0.0 1.7 1.9 1.4 1.6 1.6
Total other finance income 6.0 5.0 17.0 11.2 11.7 12.6 12.1 12.2
Net finance charge in respect of post employment plans in deficit (42.0) (38.0) (29.0) (34.3) (33.5) (32.8) (33.3) (33.2)
Unwinding of discounts (17.0) (16.0) (9.0) (12.7) (12.3) (11.7) (12.1) (12.0)
Hyperinflation adjustment (3.0) (4.0) (13.0) (25.5) (25.2) (22.8) (24.1) (23.9)
Other finance charges (3.0) (5.0) (6.0) (5.1) (5.4) (5.4) (5.3) (5.4)
Total other finance charges (65.0) (63.0) (57.0) (77.6) (76.2) (72.8) (74.8) (74.5)
Net other finance charges (59.0) (58.0) (40.0) (66.4) (64.5) (60.2) (62.7) (62.3)
Appendix E: Tax Rate Analysis
Source: Company Filings, KPMG1 Based on UK government announcements outlining corporate tax rate reductions from April 1st 2015 onwards
31
(in millions GBP) 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E
Profit from continuing operations before taxation £3,043.0 £3,057.0 £2,711.0 £4,025.6 £4,161.9 £4,252.6 £4,368.5 £4,447.7
UK Corp. Tax Rate1
25.50% 23.75% 22.50% 20.75% 20.00% 20.00% 20.00% 20.00%
Taxation 776.0 726.0 610.0 835.3 832.4 850.5 873.7 889.5
Elmination of notional tax on after tax results of associates and joint ventures (52.0) (46.0) (56.0) (51.3) (51.3) (51.3) (51.3) (51.3)
Differences in overseas tax rates (22.0) (5.0) 33.0 2.0 2.0 2.0 2.0 2.0
Items not chargeable (391.0) (331.0) (283.0) (319.0) (310.6) (307.6) (310.8) (309.8)
Items not deductible 100.0 125.0 154.0 134.5 138.5 140.4 138.6 139.1
Changes in tax rates 15.0 7.0 4.0 4.0 4.0 4.0 4.0 4.0
Adjustments in respect of prior years 585.0 31.0 (15.0) (15.0) (15.0) (15.0) (15.0) (15.0)
1,011.0 507.0 447.0 590.5 599.9 623.0 641.2 658.5
Appendix F: Weighted Average Cost of Capital
Source: Bloomberg, Company Filings
32
5.19% 6.95% 7.20% 7.45% 7.70% 7.95%
0.91 4.87% 4.96% 5.05% 5.13% 5.22%
0.94 4.94% 5.03% 5.12% 5.21% 5.30%
0.96 5.01% 5.10% 5.19% 5.28% 5.38%
0.99 5.07% 5.17% 5.26% 5.36% 5.45%
1.01 5.14% 5.24% 5.33% 5.43% 5.53%
Risk Premium
Eq
uit
y B
eta
(β)
Pre-tax Cost of Debt 3.8% Risk-free rate 1.62%
Corporate tax rate 22.5% Risk premium 7.45%
Cost of Debt (Kd) 2.9% Beta (β) 0.96
Kd = D = Weight of debt in capital structure Cost of equity (Ke) 8.8%
Debt as a % of D+E 61.5%
t = β = Equity beta Equity as a % of D+E 38.5%
WACC 5.19%
rf = rm = Market return
D/(D+E) Based on company filings
E/(D+E) Based on company filings
rf 5-year US government bond
β Bloomberg equity beta as of October 30, 2014
ERP Based on average S&P 500 returns of the past 5-
10 years
Kd Based on management projections
t Based on management projections
Sensitivity Analysis
Pre-tax Cost of Debt
Corporate Tax Rate
Risk-free rate
WACC Calculation
Capital Structure 61.5%
38.5%
Overview of WACC Calculation
Assumptions
Cost of Debt 3.8%
22.5%
Cost of Equity 1.62%
0.96
7.50%
Ke = Cost of Equity Weight of equity in capital structure=E WACC
Cost of Debt Cost of Equity
Appendix G: Venezuelan Hyperinflation Analysis
Source: IMF, Worldbank
33
World L. America Venezuela
1993 6.7% 8.5% 31.6%
1994 9.8% 12.1% 62.9%
1995 8.0% 9.9% 51.8%
1996 5.5% 4.8% 115.5%
1997 4.0% 4.5% 38.4%
1998 4.6% 4.6% 18.9%
1999 3.9% 3.9% 26.2%
2000 5.2% 8.6% 29.5%
2001 3.5% 3.8% 8.0%
2002 3.3% 4.1% 33.0%
2003 3.7% 5.4% 34.9%
2004 5.5% 6.2% 34.0%
2005 5.4% 5.6% 29.6%
2006 5.4% 5.9% 17.9%
2007 5.7% 6.6% 15.4%
2008 8.1% 7.9% 30.1%
2009 2.3% 3.0% 7.8%
2010 4.7% 5.1% 45.9%
2011 5.5% 5.6% 28.2%
2012 3.5% 3.6% 14.1%
2013 2.5% 2.9% 59.9%
2014E 2.4% - 64.3%
2015E 2.3% - 62.9%
Year
Inflation Rates
0%
20%
40%
60%
80%
100%
120%
140%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
Diageo currently sells various products in Venezuela and makes
adjustments to its financial statements based on the inflation rate in
the country
IMF estimates were used as the base for our hyperinflation
adjustment projections.
