After a re-rating Diageo's stock as "underperform" since the completion of Pillsbury and the regulatory ratification of the acquisition of the Seagram assets, WestLB Panmure believes that a further re-rating is not possible without further re-restructuring. 

The bank explained that its mathematical modelling of ready-to-drink (eg, Smirnoff Ice) product life cycles shows that the growth of this category is not as bullish as the market seems to expect. The rapid entry of a whole host of new products means that growth and margins should start to wane.

WestLB Panmure is proposing that Diageo secure its £1.3bn (US$1.85bn) of ageing whisky inventory and the partial flotation of Burger King (BK) fastfood chain.

It may be possible for Diageo to crystallize £6bn of value (22% of Diageo's market capitalisation) and see its share price rise over 1000p, if the group returned the proceeds to shareholders, said the bank: "Remember that the financiers Texas Pacific have been reported to be backing an MBO proposal on BK. This is important because these financiers have also backed the securitised pub company Punch Taverns, which is also about to list. The point is, if Diageo doesn't securitse and float BK in 2003, then we believe that there is a good chance that the financiers will - to the detriment of investors."

WestLB Panmure is sure that Diageo will not manage this, however, due to four reasons: "Enron has cast considerable concerns on the efficacy of off-balance sheet vehicles; Diageo is already highly cash-generative (we expect returns on invested capital to grow from 12% in 2002E to 14.8% in 2005E). It is overly focused on the integration of the Seagram assets [and] it is in too much of rush to sell BK."

"If management cite any of these reasons for not under-taking further restructuring," said the bank, "we believe that it just reinforcing the status quo rather than seeking to maximise shareholder value. That said, we are not saying that securitisation is Diageo's panacea. But, if there is to be any credibility to the contention that the stock should be valued alongside franchised companies such as PepsiCo and Coca-Cola (on 2003E EV/EBITDA multiples of 12.7x and 16.5x respectively), then it has to re-engineer its balance sheet accordingly."