Week in Review

December 14, 2012 3:58 pm

Diageo gives up pursuit of Jose Cuervo

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Diageo, the world’s biggest distiller by sales, this week pulled the plug on its protracted and complex talks to buy Jose Cuervo, the family-owned tequila maker.

The maker of Johnnie Walker Scotch whisky and Smirnoff vodka quit the negotiation table after failing to agree terms, including on price and the assets to be included in the package, with the Beckman family owners.

Diageo, whose shares have been on a three-year roll and are up by almost one-third year-to-date, is sanguine about losing its quarry, as are many sell-side analysts.

Sales are falling and distributor margins thin. Thus dropping Jose Cuervo out the equation erases £300m of sales and maybe 2p earnings per share – a drop in the barrel of £10.8bn in net sales last year – but top line growth rates and margins will look better.

But part of the reason sales are lower is because the brand’s ownership was in question, denting enthusiasm to invest in marketing and promotions. Equally, margins would have fattened up as a wholly owned part of Diageo’s drinks cabinet; and analysts reckon there would likely have been spillover too, from taking Diageo’s Scotch to Mexico alongside Jose Cuervo.

Nonetheless, most agree that tequila, ostensibly the easiest deal to integrate, is the one Diageo could best afford to lose. This year it signed a brace of smaller deals, paying $450m for Ypióca, a Brazilian maker of cachaça, and taking a stake in United Spirits, India’s biggest drinks company.

That has not stopped talk about other possible targets, almost all of which chief executive Paul Walsh keeps a beady eye on. But the most obvious target, Beam, the maker of Jim Beam bourbon, carries a potent kick. It is horribly expensive, in part because it has a takeover premium baked in, and has a long tail of small brands, most of which would need to be sold off.

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