2nd UPDATE: Diageo To Flood Pension Deficit With Whisky

(Adds detail and comment.) By Michael Carolan Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Global drinks giant Diageo PLC (DEO) said Thursday it will flood its GBP862 million pension deficit with whisky, in the latest example of companies using existing assets to solve pension headaches. The company will transfer up to 2.5 million barrels of its maturing whisky, which is enough to fill around 180 Olympic swimming pools, to its pension fund as part of a 10-year funding plan it has agreed with the trustees of its U.K. pension scheme. As the world's largest whisky producer, with brands such as Johnnie Walker and Talisker, Diageo will use some of the highly valuable barrels of whisky it has maturing in warehouses across Scotland. The liquid stock held by the scheme will come from Diageo's malt and grain distilleries in Scotland and represents around 30% of Diageo's total whisky stock. The move follows similar schemes from other U.K. companies including hotel and restaurant group Whitbread PLC (WTB.LN), J Sainsbury PLC (SBRY.LN) and Marks & Spencer Group PLC (MKS.LN) which all used property assets to boost their pension funds. Independent pension consultant John Ralfe said that while the Diageo deal seemed unique in its use of whisky, the rationale behind it was no different to the recent property deals. "Companies are looking for corporate assets which they can pledge to pension schemes which mean they don't have to put in cash," he said. The liquid held by the pension scheme will be a maximum of three years old and will therefore not be old enough to be bottled as whisky. Once the liquid reaches three years old and becomes usable, Diageo will take back the stock and replace it with fresh liquid, thereby ensuring that the value of the stock held remains constant at GBP430 million. The maturing whisky will generate around GBP25 million of income to the pension scheme each year, Diageo said. After 15 years, the pension trustee will sell its share of the partnership back to Diageo for an amount equal to the remaining deficit and no more than GBP430 million. The deal provides the pension fund with an immediate and significant reduction in its deficit, a spokesman for Diageo said, while having no impact on the drinks giant's free cashflow. It also ensures Diageo retains complete control over its ability to use the liquid, he said. Given that Diageo has been paying GBP50 million per year to its U.K. scheme since 2007, the new pension provisions will be broadly cash flow neutral and will have no impact on the value of Diageo's net assets. Diageo will continue to make the annual GBP50 million payments and also made a one-off payment of GBP197 million into the U.K. pension fund as agreed under the 2006 funding plan. Diageo said that its "significant" pension deficit of GBP862 million was because the valuation was carried out during "an unusually volatile" time, with historical lows in both asset values and interest rates. The Diageo spokesman said the deficit was not significant when compared with Diageo's assets and cash flow however and will be much lower when Diageo reports its results in August. -By Michael Carolan and Molly Neal, Dow Jones Newswires; 44-20-7842-9278; michael.carolan@dowjones.com (END) Dow Jones Newswires July 01, 2010 08:28 ET (12:28 GMT)