Aviation Gin

Almost three years to the month, the Casamigos playbook is re-deployed: celebrity entrepreneur + existing management / RTM + high multiple. This time around the latter — north of 20x trailing LTM NSV by my estimate — barely warrants a peep from analysts and rightfully so. The playbook has been proven to work and, as one half of Rolls Royce once said, value will be remembered long after the price is forgotten. 

At $375m Diageo has bought a cheap call option (and written a $235m put in the form of an earn out — which if exercised in full is still capped below value created given the likely high volume threshold) on an entire under-developed category in the world’s most lucrative/accessible spirits market. The hope is that Aviation becomes a category leader in gin à la Tito’s in vodka or Jameson in Irish whiskey. No doubt this time around Diageo’s bankers took a short cut and used a simple Black Scholes model to value this business rather than doing another 158 versions of a DCF. 

The asymmetric payoff is further contextualised by the market in general: it’s easier to justify investing of this sort when investors are attaching a premium to growth “platforms”. 

I’m still not sure though what this brand is about other than Ryan Renolds’ unique tone of voice and ability to quickly make viral videos, something I’ve covered in an earlier newsletter (and have subsequently been proven wrong about). I was always told a brand these days had to have a wider moat and a real founding story. But then what do I know, I have neither RR’s bank balance nor six pack.

Staycation & The On-Trade

Under normal circumstances I’d be in the Southern US right now having some BBQ and improving my marksmanship at the local shooting range (yes, really). But this year we, like a lot of families, decided to remind ourselves of the beauty of the UK. Ours has been a 1,600 mile trip with stops on and off the beaten path.

Lots of eating and drinking out has shown how difficult the recovery will be. Despite the EO/HO scheme, social distancing has fundamentally changed the economics of the on-trade. Table capacity is likely down by 30% but, more significantly for the drinks business, the removal of the standing bar will have a devastating impact on revenue and margins of most outlets. In addition, as people linger less, the traditional interaction with the bar tender (often the advocate for new brands) ceases, creating a disproportionate impact on those brands that don’t have at least one foot in the off-trade. Q3CY20 will be challenging; the only redeeming feature in my Q4 is a higher average transaction multiple thanks to the above.