Great Investment in this Simple Company
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the mistakes we investors can sometimes make is to assume that an overly-complicated investment is the same thing as a great investment. “I understand nothing about Company-X’s business model. It is so complicated that is must be great!” Often, however, the exact opposite can be true. The simplest companies and products can be the most consistently great long-term investments. By simply I am referring to companies selling products that have existed mostly unchanged 50 or more years. The kinds of products that will likely still be made and sold the same way 25, 50, or even 100 years in the future. And in the investing universe, it does not get much simpler than the liquor industry or the nearly three-century old company, Moët Hennessy.
Complicated Corporate Structure
Probably the most complicated thing about Moët Hennessy is the way it is structured. Moët Hennessy is the result of a merger between the 270 year old champagne producer Moët & Chandon and the 248 year old cognac producer Hennessy. Together, Moët Hennessy comprises the Wine and Spirits business group of the luxury conglomerate LVMH Moët Hennessy • Louis Vuitton (NASDAQOTH: LVMUY). The over 60 combined business entitles that form this conglomerate are the world’s largest luxury goods company.
Moët Hennessy is also 34% owned by the UK-based Diageo (NYSE: DEO), the world’s largest spirits company. This is a 66/34 joint venture company between LVMH and Diageo has been a small point of contention for both companies in recent years (more on that later in the article). Diageo’s ownership stake does not include all of LVMH’s alcohol brands however, excluding the champagne brand Château d'Yquem and the wine brands Cheval des Andes and Château Cheval Blanc.
Moët Hennessy’s Simple Liquor Portfolio
Moët Hennessy is the world’s No. 11 wine and spirits company. The company’s Hennessy brand is the world’s No. 1 cognac brand, controlling 42.6% of the entire worldwide cognac market in 2012 (up from 41.1% in 2011). The world’s largest champagne company and a world leader in wine, the company’s brands include Moët & Chandon, Dom Pérignon and Veuve Clicquot (to name a small few).The company also produces a few non-wine based liquors: Belvedere vodka, Glenmorangie and Ardbeg Scotch whiskeys, 10 Cane rum, and Wenjun baijiu (a Chinese white liquor).
Emerging Market Opportunity
Moët Hennessy’s most stable cash-generating region is the United States, making up the largest percentage of the company champagne, wine, cognac, and spirits sales. Like with most consumer products companies though, the real opportunity for growth is not in the developed market countries, but in the emerging markets. And Moët Hennessy is well positioned with a product taking certain emerging market countries by storm: the cognac brand Hennessy.
The company’s Hennessey brand has seen explosive growth in Asia, where the region excluding Japan made up 47% of all of Hennessy’s sales (add an additional 1% for Japan’s contribution). China in particular has been the primary driver of sales, as the emerging Chinese middle-class just cannot get enough of the Cognac region’s brandy. In a very short amount of time, China has become the entire cognac industry’s largest market, with Hennessey and Pernod Ricard’s Martell leading the way. China is not alone though, as Russia, Thailand and Vietnam have also been seen as future growth opportunities for Hennessy and cognac in general.
Merger and Acquisition Opportunity
Consolidation within the liquor industry has been rampant. Moët Hennessy has made its fair share of mergers and acquisitions over the years as well. But the opportunity here lies not with outside purchases, but with what might happen within the company.
Diageo has expressed a desire to acquire the remaining 64% stake in Moët Hennessy from LVMH. LVMH, however, has expressed an opposing desire not to sell its stake in the joint venture company. And that has seen the situation for many years. This is not particular concern for LVMH, as they own the larger controlling stake in Moët Hennessy.
Diageo 34% minority stake, however, has actually been seen as a slight hindrance for the UK liquor giant. Diageo does not have complete control over the business, while at the same time its minority stake prevents them from perusing their own acquisition opportunities in the champagne, wine, and cognac markets. Because Moët Hennessy is the world’s largest champagne company, the world’s largest cognac brand, and one of the world’s largest wine companies, any large acquisitions in these areas by Diageo might be subjected to possible anti-trust objections by European regulators. Diageo’s own wholly-owned champagne, wine, and cognac operations are relatively small by comparison. Diageo would love to be able to acquire Moët Hennessy outright or be able to acquire another large player in champagne, wine, or cognac.
LVMH’s Chairman and CEO Bernard Arnault, however, is not a man who seems willing to part with the luxury products empire he has spent his life building. Mr. Arnault (who controls the majority of the voting rights) has even devised a legal method to prevent the breakup of his conglomerate after his death (hopefully far in the future for the 64 year old). Forming a private foundation called Protectinvest, in the event of his death his heirs will be unable to sell any of his shares until at least 2023. You can’t take it when you when you die, but apparently you can still exert a measure of control even from the grave.
Unless Mr. Arnault changes his mind and decides to sell Moët Hennessy (LVMH’s consistent cash-generator and 15% of revenues), Diageo might be compelled to sell its stake to LVMH so they can peruse their own opportunities in champagne, wine, and cognac. A possibility for Diageo might be Rémy Cointreau, the world’s No. 12 spirits company and owner of the world’s No. 2 cognac brand Rémy Martin. Rémy Martin is a far distant second to Hennessy, but it would be the next best thing and allow Diageo to capitalize on China’s thirst for luxury cognac brands.
Foolish Bottom Line
While LVMH’s business groups in luxury fashion, leather, perfumes, cosmetics, watches, jewelry, and retail stores are anything but simple, liquor has been a particular simple sector of the stock market. And in these complicated times of Cyprian bank defaults, Washington-created crises, and increased tensions on the Korean peninsula, a little bit of simple could just be what an investor needs right now.
Matthew Luke owns shares of LVMH Moët Hennessy • Louis Vuitton and Pernod Ricard. The Motley Fool recommends Diageo plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!