Diageo looking better after a few shots (of cash) as Moody's gives the seal of approval for its asset swap with Heineken

Madeline Ratcliffe
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Diageo is expected to use its new-found riches to reduce its debt burden (Source: Getty)

Diageo's fortunes are looking up, after Moody's predicted the company's finances will recover over the next 12-18 months, boosted by its asset swap with Heineken last week.

Diageo received £515m from selling its holdings in Jamaican brewer Desnoes & Geddes and Malaysian-listed GAPL to Heineken, in return for Heineken's 20 per cent stake in Guinness Ghana Breweries, which will increase Diageo's shareholding to 72.42 per cent.

The drinks giant will use the cash to reduce its debt burden, and offset some of the losses from its purchase of 26 per cent of United Spirits last year for £1.12bn, which has so far only netted £53m in annual profit.

The company, which is the largest spirits manufacturer in the world, revealed in its last trading update it has also been hit by currency wars in emerging markets, which have lowered demand for its premium spirits, reducing full year profits by £150m.

But Moody's said the asset sale will help Diageo's credit recover over the next 12-18 months, especially if the performance of its US operations picks up.

The analyst's note said as well as increasing control over its Ghanian operations, the sell-off will lower Diageo's debt to three-times its earnings before interest, tax, depreciation and amortisation (Ebitda), down from a ratio of 3.1 times.

Cash flow to net debt will increase to 12.6 per cent from 12.1 per cent, which is currently below Moody's guidance of 14-16 per cent for companies with an A3 rating.

The move is the latest in a series of similar restructuring moves by Diageo, which sold its South African assets to Heineken for £128m, and swapped Irish whiskey brand Bushmills for 50 per cent in Don Julio tequila (which it already owned half of) from Casa Cuervo, in a deal that netted £255m for the company.

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