Diageo Sells Off Some Brands for Half a Billion British Pounds

2010 aerial view of Diageo USVI's Captain Morgan Rum distillery on St. Croix. (File photo, © Eric Crossan)
2010 aerial view of Diageo USVI’s Captain Morgan Rum distillery on St. Croix. (File photo, © Eric Crossan)

Diageo, owner of a large, taxpayer-financed distillery on St. Croix that accounts for more than $50 million in federal tax revenues for the territory each year, has sold off a portfolio of 19 liquor brands to Sazerac, a family-owned liquor conglomerate, for £550 million in British Pounds.

According to a statement from the company, the net proceeds after taxes and other costs, will be around £340 million and will be returned to shareholders through a share repurchase following completion. In other words, the company is using the funds for stock buybacks. The company previously announced as much as £2 billion in stock buybacks.

In 2017, the GOP-controlled Congress reduced the corporate tax rate from 35 percent to 21 percent and cut the rate for bringing in money from abroad. In July, CNN reported this triggered $437 billion in stock buybacks in 2018, citing data from financial research firm TrimTabs. Stock buybacks put cash in the pockets of shareholders.

Diageo’s agreement with the government of the Virgin Islands gives the refinery’s revenues total tax forgiveness on corporate income tax, gross receipts tax and property tax. While the St. Croix refinery pays no local or federal corporate taxes, its 40-plus employees pay income tax. And the federal government charges excise tax on the rum sold within the 50 states and remits those funds to the U.S. Virgin Islands. While the exact numbers change, the territory gives around $50 million of the federal revenue back to Diageo each year, and a similar amount to Beam Suntory, owners of Cruzan Rum, for roughly $100 million in direct annual cash subsidies. The government gets a similar amount, with most of the revenue going to pay debt service on government bonds and about $16 to $20 million going to bolster the annual territorial budget.

The transaction, which is subject to regulatory approval, is expected to be completed early in 2019.

Ivan Menezes, CEO of Diageo.
Ivan Menezes, CEO of Diageo.

Ivan Menezes, chief executive of Diageo, said “Diageo has a clear strategy to deliver consistent efficient growth and value creation for our shareholders. This includes a disciplined approach to allocating resources and capital to ensure we maximize returns over time. Today’s announcement is another example of this strategy in action. The disposal of these brands enables us to have even greater focus on the faster growing premium and above brands in the US spirits portfolio.”

According to Diageo, the brands included in the transaction are Seagram’s VO, Seagram’s 83, Seagram’s Five Star, Myers’s, Parrot Bay, Romana Sambuca, Popov, Yukon Jack, Goldschlager, Stirrings, The Club, Scoresby, Black Haus, Peligroso, Relska, Grind, Piehole, Booth’s and John Begg.

Diageo has also agreed to enter into long-term supply contracts with Sazerac on completion for five of the brands each for a period of ten years. Supply of all other brands will transition to Sazerac within a one year period from completion.