Diageo splashes out £300m for Brazilian national drink

By SCOTT REID AND DAVID JONES
Published on 28/05/2012 19:18

JOHNNIE Walker-owner Diageo will boost its presence in fast-growing emerging markets after agreeing a £300 million deal to swallow a leading brand of Brazil’s national drink.

The group, which also owns Guinness and Smirnoff and is aiming to get half of its sales from emerging markets by 2015, is to buy Ypioca from its family owners.

Ypioca is the third-biggest player – by volume – in the market for cachaca, a spirit made from fermented sugar cane also known as Brazilian rum, and is the leader in the rapidly-expanding premium segment of the market.

The acquisition marks an expansion in Diageo’s Latin American business, which already sells Venezuelan dark rums Cacique and Pampero, and distributes Mexico’s top tequila brand Jose Cuervo.

Chief executive Paul Walsh said: “Brazil is an attractive, fast growing market with favourable demographics and increasing disposable incomes.

“This acquisition gives us the leading premium brand in the largest local spirits category. It will also provide Diageo with an enhanced platform from which to accelerate the long-term growth of our premium international spirits brands in Brazil.”

Cachaca accounts for about 80 per cent of the volume of the Brazilian spirits industry and, when mixed with ice, sugar and lime makes the Brazilian cocktail caipirinha.

Diageo, like other international drinks groups, is looking to build its presence in emerging markets in order to offset sluggish demand in austerity-hit Europe.

The group, which ranks as Scotland’s largest whisky distiller, has long been in discussions with the owner of Jose Cuervo about taking a stake in the $3 billion-plus (£1.9bn-plus) valued tequila brand, with some sources saying progress in the talks has slowed due to problems about the ultimate control of the brand. Diageo made no comment about its talks about Cuervo.

The group has also recently invested in businesses such as Mey Icki in Turkey and ShuiJingfang in China to push up its sales from emerging markets which currently account for nearly 40 per cent of its global total.

The company said its cachaca purchase is expected to be earnings neutral in the first full year of ownership and cover its cost of capital by year five, which analysts said put it in line with recent deals. The London-headquartered group did not give any profit figures for the Brazilian business.

Diageo is buying the business from the family-owned Ypioca Agroindustrial with its 160-year heritage in the northeastern Brazilian state of Ceara. The deal gives it a cachaca distillery, bottling plant and warehouse.

UBS analyst Melissa Earlam said: “We view this style of bolt-on emerging market deal positively, offering local premium brand leadership as well as distribution synergies over the mid-term for Diageo’s international spirits.”

Diageo reported 23 per cent net sales growth in Latin America in its half-year results to December.