Diageo, the group which owns Guinness, is being recommended as a buy for investors by Merrill Lynch.

The group, which has recently sold Pillsbury to General Mills and is currently in the process of merging Guinness with its United Distillers and Vintners business, represents good value at current levels and is a long-term buy, according to the brokers.

It estimates that the combined Guinness/UDV group is currently valued at a discount of between 20 and 30 per cent to other leading beverage companies. The integration is forecast to generate cost savings of around £100 million sterling by 2003, enhancing the potential for further growth at Diageo.

The Pillsbury sale for $10.5 billion was also ahead of market expectations. Merrill Lynch says further earnings growth could be generated from a share buy-back programme. On a conservative estimate it suggests the shares could rise to £7.50 sterling within the next 12 months. The brokers believe Diageo will deliver on its strategy and the shares will be re-rated.

However, current uncertainties such as the completion of the General Mills transaction and the flotation of Burger King may weigh on the shares in the shortterm. "We regard this period of uncertainty as a buying opportunity."