UPDATE: Diageo To Use Maturing Whisky To Plug Pension Gap

(adds detail) By Michael Carolan Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Global drinks giant Diageo PLC (DEO) said Thursday it's transferring more than 2 million barrels of its maturing whisky to its pension fund as it seeks to plug its GBP862 million pension deficit. The company has agreed a 10-year funding plan with the trustees of its U.K. pension scheme, it said in a statement. As well as paying GBP197 million into the U.K. scheme, Diageo said it was setting up a partnership to hold between 2 and 2.5 million barrels of maturing whisky as assets. This innovative partnership will provide an income to the scheme of about GBP25 million each year. After 15 years, the pension trustee will sell its share of the partnership back to the company 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. A number of U.K. companies including hotel and restaurant group Whitbread PLC (WTB.LN), J Sainsbury PLC (SBRY.LN) and Marks & Spencer Group PLC (MKS.LN) have recently set up similar schemes to plug their pension deficits. All of these schemes have used property assets to boost their pension funds. 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 liquid 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, Diageo will buy back the stock and replace it with fresh liquid, thereby ensuring that the value of the stock held remains constant at GBP430 million. 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 said that its "significant" pension deficit of GBP862 million was due to the valuation being 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, Dow Jones Newswires; 44-20-7842-9278; michael.carolan@dowjones.com (END) Dow Jones Newswires July 01, 2010 06:09 ET (10:09 GMT)