Beam’s on the radar after Diageo pulls out of tequila takeover talks

By GARETH MACKIE
Published on 11/12/2012 08:03

WHISKY giant Diageo has pulled the plug on long-running talks to swallow tequila brand Jose Cuervo in a surprise move that could open the door to a swoop on US bourbon producer Beam.

As talks with the controlling Beckmann family came to an end, the owner of Johnnie Walker whisky and Smirnoff vodka also said yesterday its deal to distribute Cuervo outside Mexico will he halted in June.

Cuervo is the world’s biggest-selling tequila brand, worth an estimated $3 billion (£2bn).

The two companies have an existing tequila joint venture dating back to 2003, when Diageo sold a 50 per cent stake in “ultra premium” brand Don Julio to Cuervo for $100 million, but that relationship is likely to continue despite yesterday’s developments.

The UK drinks firm is understood to have held talks with Japanese brewer Suntory about launching a $10bn bid for the maker of Jim Beam bourbon and Sauza, the world’s second-largest tequila label, but the spirits group declined to comment yesterday.

Analysts said a joint bid could see Beam’s brands broken up between the buyers, with Diageo expected to show more interest in its bourbon assets than tequila, a sector where customer tastes are shifting towards the higher end of the market.

Tequila accounts for 3 per cent of Diageo’s business. Net sales of Jose Cuervo fell 5 per cent last year, but Don Julio enjoyed a 26 per cent jump. Diageo chief executive Paul Walsh said the group had enjoyed a “long and successful” relationship with Cuervo, which traces its roots back to 1795, when King Carlos IV of Spain granted Jose Cuervo the first commercial licence to produce tequila.

Walsh added: “We believe that the future of the brand would be best delivered by aligning ownership of the brand with its route to market and I have no doubt that Diageo has the best route to market for this brand.

“However, it has not been possible to agree a transaction which delivers value for Diageo’s shareholders and therefore, by mutual agreement, we have terminated our discussions.”

Shore Capital analyst Phil Carroll said the breakdown in talks had come as a surprise, adding: “It would appear that there must have been some level of difference in opinion over valuation. We suggest that the brand owners would be looking at the performance of the premium and above segment, and Diageo at the more mainstream segment.”

The group is looking to tap into growing demand from the burgeoning middle classes in emerging economies such as India, where the alcohol sector is predicted to expand by 15 per cent annually over the next five years.

Last month, the firm announced plans to pay £1.3bn for a majority stake in Vijay Mallya’s United Spirits which has a 41 per cent share of the Indian market and owns Whyte & Mackay.

Diageo’s sales in Latin America and the Caribbean jumped 16 per cent in the first quarter, offsetting a 1 per cent decline in European sales as tax rises in France and the ongoing eurozone crisis weighed on demand.

• The Scotch Whisky Association (SWA) has predicted an uplift in exports to Latin America after the EU ratified a deal that will see the abolition of taxes that favoured locally-produced spirits. Whisky exports to the region rose 38 per cent to £489m last year.