Diageo agrees to swaps whiskey for tequila

Diageo has agreed to swap its Bushmills Irish whiskey label for full ownership of the high-end Don Julio tequila, as the group seeks to regain its leading position in the Mexican spirit.

Chief executive Juan Domingo Beckmanns family company completed deal with Diageo. Picture: PA

The world’s largest spirits maker has agreed a deal with the Beckmann family of Mexico to take the 50 per cent of Don Julio it does not already own in exchange for its Bushmills Irish whiskey brand.

Diageo did not give the full financial terms of the deal, but analysts at Nomura estimate its value at around £440 million.

Don Julio is the top-selling “ultra-premium” tequila in the United States, with bottles costing up to £240. In the year to 30 June, its sales jumped about 27 per cent.

Diageo sales are sagging amid a sharp slowdown in some emerging markets that has been only partially offset by the strength of higher-margin “reserve brands” such as Johnnie Walker Blue Label, Ciroc Vodka and Zacapa Rum.

While Bushmills is a well-known label, it carries a more modest price tag, competing with the much-larger Jameson brand, owned by Pernod Ricard. According to investment bank Nomura, it was never a huge focus for Diageo, given its large presence in Scotch whisky.

Under the deal, Diageo will also get a £255m payment and the right to distribute Don Julio and its Smirnoff vodka in Mexico, boosting its position in a country whose economy is growing, along with its pool of middle-class drinkers.

Diageo chief financial officer Deirdre Mahlan said: “We have been talking about our strategy in emerging markets for some time, and this transaction is a deliberate step in the execution of that strategy.” She was referring to a history of buying local spirits makers in emerging markets, and using them as a platform to sell its international brands.

That strategy has given Diageo a larger exposure to volatile markets, shaken up in recent quarters by a recession in Brazil, a government crackdown in China and currency weakness in India.

A research note from Nomura said, given the mixed experience with recent acquisitions, buying Don Julio “may look a safer deal” as Diageo already owned half of it.

The deal does not include the Beckmann’s Jose Cuervo brand, and Mahlan said there were no discussions about it either. The world’s largest spirits maker used to sell Cuervo, the world’s largest tequila brand, outside of Mexico, but let the distribution agreement expire in 2012 after failing to reach a deal with the Beckmanns to buy it.

Despite the disagreement over Cuervo, Diageo and the Beckmanns kept their 50/50 joint ownership of Don Julio. The deal for Don Julio is expected to close in early 2015 and should be break even at the profit level by the third year, Diageo said, adding that the transaction would dilute earnings per share by 0.6 per cent in the full-year to June 2015.

In the year ended 30 June, Don Julio sold 590,000 nine-litre cases and had net sales of £105m, while Bushmills sold 800,000 cases and had net sales of £57m.

Diageo recently reported a 1.5 per cent decline in first-quarter sales, but said it was confident of delivering an increase for the full year. Shares in Diageo closed down 24.5p at 1,813.5p.

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