Diageo's (DGE.L) decades-old partnership with Moet Hennessy has delivered shrinking returns and at times caused friction, adding to challenges facing new CEO Dave Lewis as he works to revive the world's biggest spirits maker.
Investors say Lewis has bigger priorities, such as improving performance in Diageo's biggest markets. But the Moet Hennessy alliance may warrant a closer look once a turnaround takes hold. Any break-up would be complicated, however, given the terms of the two companies' agreements and joint ventures that can be costly to unwind.
When Diageo was formed through the 1997 merger of Guinness and Grand Metropolitan, it inherited Guinness' 34% stake in LVMH's (LVMH.PA) Moet Hennessy champagne and cognac division, along with several distribution ventures.
The alliance generated a $455 million share of profit for Diageo in the year ending June 2023 from both its Moet Hennessy stake and the joint ventures, company filings show. But that contribution more than halved to $219 million in 2025 as LVMH's drinks division struggled through an industry-wide downturn.
Relations between the companies have also been strained in recent years, while joint distribution arrangements have cost Diageo money, growth and market share in markets such as France, according to company filings, market-share data and Reuters interviews with six sources.
"Dave Lewis might look again (at the partnership)," Goodbody stockbrokers analyst Fintan Ryan said, adding that it once made sense but the world is different today.
"Some of these structures ... just persist until somebody wants to change things up."
Contacted by Reuters for this story, Diageo and LVMH declined to comment.
THORN IN THE SIDE?
Diageo and Moet Hennessy's long relationship has not been without frictions. LVMH boss Bernard Arnault even tried to disrupt the Guinness-Grand Metropolitan merger that created Diageo, leveraging LVMH's position as Guinness' largest shareholder at the time.
More recently, Diageo launched arbitration proceedings in 2020 after Moet Hennessy withheld 2019 dividends worth €181 million due to Diageo following the COVID-19 outbreak. Moet Hennessy ultimately paid the dividend by 2021.
The dispute meant top executives from the firms barely spoke for years, a Diageo investor said, asking not to be named as they are not authorised to speak to the media.
David Samra, managing director of Artisan Partners, a top five shareholder in Diageo, said there had been "very little dialogue" between senior executives.
More recently, however, Diageo's finance chief Nik Jhangiani has sought to improve relations by having dinners with Moet Hennessy leadership, the first investor said.
The joint ventures, which sell the companies' brands in certain markets, have also proved problematic.
In France, a key market for scotch whisky, Diageo's biggest spirits category, the Moet Hennessy-run distribution business prioritised its own brands at the expense of Diageo's, contributing to Diageo's decision to terminate the joint venture there, according to two sources with direct knowledge of the issue. The split was finalised last year.
French accounts for the joint venture, reported by Reuters for the first time, show Diageo brands consistently generated between 60% and 75% of profits. After the pandemic, however, growth increasingly came from Moet Hennessy's labels rather than Diageo's.
The companies still have eight joint ventures, all majority owned by Diageo. Six are managed by Moet Hennessy. The two firms compete directly in categories including scotch.
"Whoever controlled the JV, their product was number one," said a consultant working for Diageo, who is not authorised to speak to media.
Diageo's leading whisky label Johnnie Walker does not rank among the top 10 scotch brands by market share in France, according to market researcher GlobalData.
NO EASY EXIT
The French separation cost Diageo $145 million, mostly in termination fees.
Diageo also had to build its own sales force and customer relationships in France from scratch, costing both time and resources, Goodbody's Ryan said.
Extricating Diageo from the wider Moet Hennessy partnership would be more complex.
Diageo can exercise an option to sell its stake back to Moet Hennessy, according to LVMH filings. But that would require accepting a 20% discount to fair value. Diageo's interests in Moet Hennessy were worth about €4.3 billion in 2025, the filings show.
With spirits-sector valuations near multi-year lows, triggering a sale now makes little financial sense, several analysts and investors told Reuters. Lewis has also signalled he is not looking to sell the stake.
Meanwhile, organic sales at LVMH's wines and spirits business grew 5% in the first half of the year, signalling a possible recovery.
For investors, the priority is seeing the companies work together better and generate a stronger return for Diageo.
"That's what we're looking for," Artisan's Samra said of the stake. "To grow the business and create more profits."
