DRINKS giant Diageo unveiled a step-change in its Turkish business yesterday by splashing out £1.3 billion on raki spirits maker Mey Icki to again tap the growing middle class in emerging markets.
Diageo, Scotland's biggest Scotch whisky company with a 30 per cent market share, is buying Turkey's biggest spirits company, with an 80 per cent share in the country's top-selling category, aniseed-based raki.
The company said Mey Icki's Turkish distribution network would also be a spearhead for the British group's international brands, which range from Smirnoff vodka to Johnnie Walker whisky.
Ahead of Diageo's interim results this month, Scotland on Sunday revealed that chief executive Paul Walsh had frozen share buybacks in order to keep a warchest for potential takeovers, including the consideration of an early move on the Turkish company.
With the deal expected to be completed in the second half of 2011, Walsh said yesterday: "Turkey is an attractive, growing market for Diageo, with strong GDP growth. The acquisition of Mey Icki transforms our existing position in this fast-growing spirits market."
Andrew Morgan, the British company's European head, said: "Turkey is seeing rapid growth of its middle classes, so there is growth in local raki and vodka, while the deal provides a fantastic platform for Diageo's international brands in Turkey."
Diageo is paying the company's private equity owners, TPG Capital and Actera, just under ten times underlying historic earnings. That compares with an average multiple of about 13 for spirits acquisitions over the past decade.
Jamie Isenwater, analyst at Deutsche Bank, said the deal looked "financially and strategically sound", at a reasonable valuation.
Mey Icki had net sales of 300m in 2010 and underlying earnings before interest and tax of 120m. The British group said costsavings would be modest as it has a limited business in Turkey, mainly selling Johnnie Walker and J&B whiskies. At Diageo's recent interim results Walsh said the company had a warchest of "many billions of pounds" for potential takeovers.
He said Diageo, which employs more than 3,000 in Scotland, would consider anything, against a backcloth of American giant Fortune Brands spinning off its drinks business at the end of this year.
Analysts said Walsh would probably make any such move with a partner, such as Bacardi, to avoid regulatory concerns on market dominance, and Diageo would be particularly interested in Fortune's Jim Beam bourbon and Sauza tequila brands.Morgan said the Turkish parliament had recently agreed an amnesty for spirits covering a retroactive tax on imports between 2001 and 2009, and he was optimistic the issue would be settled favourably within weeks.
Diageo's recent results showed a mixed trading picture, with the company doing best in emerging markets and Asia-Pacific where it said it was capitalising on the emergence of a strong m`iddle class with aspirations to drink western spirits with cachet.
It contrasted sharply with the group's difficult performance in Europe, particularly in financially-stretched countries such as Ireland, Spain, Portugal and Greece. Walsh said Diageo would have to react with costcutting in those markets where consumer appetite had been damaged by the financial crisis.