The stock would have to rise more than 17 per cent to match analyst Jamie Isenwater’s 1,400 pence a share price target.

At midday it was changing hands at 1,228 pence, up a penny.

“Despite some of the best assets in consumer staples, Diageo has never delivered the growth that the market has hoped for,” he said in a note to clients this morning. 

“Our analysis shows that most of this underperformance comes from gross margin dilution driven by lower growth of its priority brands. 

“With a shift in focus signaled at the interim stage and a likely gross margin inflection point, we think top-line gains will translate better into bottom-line growth going forward.”

Isenwater says Diageo trades on a “fairly undemanding” 14.5 times forward earnings, and uses a discounted cashflow model to derive his valuation.

He points out there are a number of risks associated with investing Diageo, chief among them are excise tax increases, a renewed downturn in the US on-trade and “value-destructive M&A”.

Diageo is the brewer of Guinness, but is better known around the world for spirit brands such as Smirnoff and Johnnie Walker.

Last year it posted sales of £9.78 billion and profits of £2.4 billion. This year profits are predicted to grow to around £2.6 billion, according to Deutsche Bank.

Perversely the success of, the recently acquired, Blackwood's Gin and Diva Vodka brands is also costing the firm as a result of higher earn-outs due before the final purchase dates in 2012 and 2015. 

“As a result of the expected shortfall, and the likely working capital requirements of the re-listings, the company is likely to need to introduce extra capital to the business,” Blavod said.  

“The Board is currently exploring ways in which this can be achieved.” 

At 10:25 on AIM, Blavod shares were down 1.125p, about 43 percent, trading at 1.5 pence each.

A Morgan Stanley second quarter earnings preview of consumer goods focused stocks, including Diageo (LON:DGE) and Reckitt Benckiser (LON:RB.), suggests a mixed outcome and outlook across the food, beverages, tobacco and home and personal care sectors.

For food producers, Morgan expects their focus on pricing recovery to offset raw material inflation to have begun impacting volumes, especially as the trading environment remains challenging in developed markets.

The broker anticipates first half underlying margins across companies it covers in the sector to fall 50-70 basis points.  However, it expects the players to compensate for this in the second half and deliver flat to marginally higher underlying margins for the full year, aided by a combination of cost savings, operating leverage and price increases.

It further expects food producers’ outlook statements to “remain cautious”.

In the beverage space, Morgan Stanley analysts expect brewers to report a “soft” set of quarterly numbers, as raw material cost inflation began to impact margins.

Brewers’ top-line growth, however, should continue to be driven by the emerging markets, they say, with volumes and pricing remaining difficult in Western Europe and in the US.

For the spirits sub-space, the analysts expect profit growth to “accelerate” in the second half for Diageo (which Morgan rates at ‘overweight’) after a number of one-off impacts for the group in the first half.

Elsewhere in spirits, they reckon Pernod-Ricard (EPA:RI) should report a good set of results, although it may reveal some adverse impact on the forex front. The stock is rated rated at ‘equal-weight’ by the broker.

In the home & personal care category, Morgan Stanley expects results to reveal players had a challenging quarter against a backdrop of input cost headwinds, which are still peaking, and as they experienced difficulty in recovering pricing strength.

As a result, the analysts believe performance across home & personal care will now be second half weighted.

Among stocks it covers in this space, Morgan reckons Reckitt Benckiser (rated “equal weight”) is likely to have continued to experience tough trading across household goods.

As for the tobacco sector, the broker is banking on “another set of strong results” from companies as pricing, beyond Spain (where there is a price war ongoing), continues to remain strong.

The broker adds further that with limited input cost pressures and widespread potential for further cost reduction across the sector, tobacco players should benefit from further margin expansion and strong cash generation going forward.

Further upside to cash returns from the tobacco will likely be a “key surprise’ across the sector for 2011, it adds.

The deal values Fosters’ shares at A$4.90 each, though the stock surged to A$5.19 at one point in a frenetic session as investors bet on SAB lodging a higher offer.

Today’s move is just the latest in a series of mega-deals in the sector which have seen Brown Ale maker Scottish & Newcastle and Anheuser-Busch, creator of the iconic Budweiser lager, taken out. 

"The board of Foster's believes that the proposal significantly undervalues the company in the context of a change of control and, as such, it does not intend to take any further action in relation to it," the company said in a statement.

SAB this morning confirmed in a stock exchange statement that it had lodged what it called a non-binding offer for its Aussie counterpart. 

“SABMiller has a proven track record of acquiring and integrating brewing companies in a way which benefits shareholders, employees, business partners and the broader community,” said chief executive Graham Mackay.

"We aim to strengthen the Foster's brand portfolio and work with the local team to bring our innovation, global scale and expertise to the business.

"We continue to believe that the proposal price is attractive and offers good value to Foster's shareholders. SABMiller can conclude a transaction quickly and will continue to seek engagement with the Board of Foster's to put an agreed proposal to Foster's shareholders."

The prize for SAB is a company that has 50 per cent market share in its native land and some of the highest profit margins in the industry.

SABMiller already owns the Foster's brand in India and the US brewing rights.

Newswire reports suggest there is the potential of counter-bid, though already Japan's Asahi Breweries and Tsingtao have ruled themselves out of the running.

The finger of suspicion is currently pointing at  Mexico’s Grupo Modelo SAB de CV and Molson Coors Brewing Co, which are rumoured to be plotting a joint takeover. 

Improved pricing and cost efficiency led the underlying performance. On a constant currency basis, group revenue growth and earnings improved by 3% and 11% respectively. SABMiller achieved margin growth of 110 basis points, and free cash flow improved by $1.1 billion through the six month period.

On a constant currency basis, underlying earnings performance was strong where the company’s Asian and African division performed the best, rising 29% and 15% respectively. In its western markets, earnings growth was more restrained. In North America, cost synergies lead to a 7% rise in earnings. Meanwhile in Europe the group’s solid pricing overcame reduced volumes, resulting in a 5% increase in earnings.

Graham Mackay, Chief Executive of SABMiller commented on the group’s performance: "In some of the toughest economic conditions seen for decades, we have continued to take share in a number of markets.  The weakness of our major operating currencies against the US dollar has affected reported results, but we have continued to generate a strong underlying performance. The actions we have taken to position our business globally, to invest in brands and to develop our operational capabilities will continue to underpin our long term growth."

The transaction includes the purchase of the Maheu brand 'Super Maheu No.1' which is a non-alcoholic maize drink available in a variety of flavours.

Completion of the acquisition is expected to take place in the next two months.

Within Zambia, SABMiller Africa already owns Zambian Breweries Group, the largest clear beer and soft drinks business in the country, and 70 percent of National Breweries PLC, which is listed on the Lusaka Stock Exchange and commands a substantial amount of the opaque beer market.

SABMiller Africa plans to grow the Maheu business throughout Zambia and across a variety of African markets, resulting in both increased sales volumes and further employment opportunities.

The JV, which is responsible for selling a number of brands owned by the two companies in the US, saw its underlying net income increase by 16.4% year on year while net sales amounted to USD 2.14 billion, up 1.6% from the previous year.

The profit climbed to USD 304.9 million from USD 174.6 million a year ago, representing
The increases were largely due to the implementation of the cost cutting measures, which sent costs down 10.8%. The year to date synergies stood at USD 110 million, with the second quarter contributing USD 60 million. The company said it now expected the synergies to reach USD 260 million by the end of the calendar year, upping the previously stated target of USD 225 million.

“Since combining operations last July, we have achieved double-digit growth in underlying earnings for four consecutive quarters,' said MillerCoors CEO Leo Kiely. 'These results show MillerCoors is connecting consumers with its new brand portfolio and effectively driving synergies to become stronger and more competitive in the U.S. beer industry,” said MillerCoors CEO Leo Kiely.

Not all the news was positive as the company said sales volumes decreased for its premium brands, including Miller Lite and Coors Light in the wake of the “current economic challenges.” The total decline in domestic sales to retailers (STRs) amounted to 0.8%, while domestic sales to wholesalers (STWs) were down 1.1%.

The losses associated with the STRs and STWs slip were offset by higher per barrel revenues in this quarter, up 3.0% year on year, stemming from the previously introduced price hikes.

SABMiller was down 2% on LSE today following the release of the news.

“SBL will form an integral part of EABL's East African supply footprint providing additional capacity to Kenya and Uganda,” Diageo stated.

Diageo plc owns 50.03% of East African Breweries, which is listed on three African exchanges: Tanzania, Uganda and Kenya. Its flagship brands include Tusker Lager, Pilsner, Guinness, Smirnoff Vodka and Johnnie Walker Scotch Whisky.

East African Breweries also confirmed that it had terminated its existing brewing and distribution agreement with Tanzania Breweries Limited.  The two companies are also currently embroiled in a legal spat.

Diageo Africa contributes to nearly a third of Diageo's net sales of beer globally and employs over 4,500 people.

Following completion of the transaction, Kulczyk Holding will hold approximately 3.8 percent of the issued share capital of SABMiller.

SABMiller said owning 100 percent of its largest and most profitable business unit in Europe will be of significant strategic benefit in the medium term. In the current financial year, the transaction is expected to have no material impact on earnings per share on a pro forma basis.

Group revenue has continued to benefit from price increases and grew in high single digits for the full year on an organic basis at constant exchange rates.  “Financial performance has been impacted by significant unfavourable currency movements in the second half of the year. However, the financial results of the group remain in line with our expectations,” the company said.

In Latin America, lager volumes were up 1 percent for the year, with a decline in the fourth quarter.  Soft drinks volumes for the region grew 2 percent for the year on an organic basis.

Europe organic lager volumes were level with the prior year reflecting the impact of the economic downturn on consumer disposable income, particularly in the second half of the year. 

MillerCoors US domestic sales to retailers for the nine months to March 31 2009 were down 0.4 percent against the prior year on a pro-forma basis.

Africa and Asia delivered organic growth of 4 percent in lager volumes for the year.

In Africa, lager volumes grew by 5 percent despite a fourth quarter in which the global economic slowdown began to take effect in most key markets.  Soft drinks volumes for the region grew 13 percent for the year on an organic basis, SABMiller said.

The assets which are the subject of the transaction totalled US$31.8 million as at December 31 2008.

SABMiller Vietnam's brewery is located in Binh Duong province and supplies the key markets of Ho Chi Minh City, Mekong Delta and Da Nang through an expanding distribution network.  The beer industry in Vietnam is still relatively small with total volumes of 18.5 million hectolitres but is expected to grow significantly, the company said.

Mai Kieu Lien, general director of Vinamilk, was cited as saying: “Vietnam offers exciting prospects. We have shared a mutually beneficial partnership with SABMiller in Vietnam's developing beer industry, but in the current economic environment we would like to restructure our business operation by focusng on our core business areas.”

China Resources Snow Breweries is acquiring a 90% interest in Shandong Hupo Brewery, with an option to acquire the remaining 10% stake, for a total cash consideration of approximately $42 million.

“Hupo Brewery is situated in Zouping county, northern Shandong Province. More beer is consumed in Shandong Province than any other province in China and Zouping county serves as a transportation hub to neighbouring major cities such as Binzhou, Jinan, Zibo and Dongying,” SABMiller stated.

Hupo Brewery has production capacity of 2.7 million hectolitres, and the joint venture will invest a further US$8 million to increase capacity to 3 million hectolitres.

Mr. Ari Mervis, Managing Director of SABMiller Asia, said; 'SNOW continues to enjoy good growth in China and the significant import sales volume that the brand already enjoys in the province certainly justifies the establishment of a production base here. The brewery has a strategic location in northern Shandong and is well connected by highways to the other major cities in this region.'

CR Snow has agreed to acquire the brewing assets of Anqing Tianzhu Beer Co, Liaoning Songlin Brewery Group Co Ltd and Zhejiang Luck Beer Co Ltd through three newly-formed subsidiaries in which it will own 80, 85 and 100 percent respectively.

Following the investment, the operations will add a total of 4.7 million hectoliters to CR Snow's existing production capacity of about 117 million hectolitres.

In Latin America, lager volumes grew by 2 percent in the quarter, while in Europe, third quarter lager volume on an organic basis declined 1 percent as the region experienced the impacts of the global financial crisis on consumer disposable income.

MillerCoors US domestic sales to retailers on a pro forma basis decreased 2.3 percent in the context of weaker beer category volumes and strong pricing.

In SABMiller’s Africa and Asia business, organic lager volumes increased 2 percent in the quarter. China organic volumes were flat, with growth in the Chinese economy slowing. In Africa, lager volumes grew by 4 percent on an organic basis with growth in most major markets with the exception of Botswana where volumes declined significantly following the imposition of a social tax levy on all alcohol products in November.