Spirits deals – a rum do

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Rum is going up in the world. Or so Gruppo Campari hopes. The Italian company is spending $414m on a Jamaican maker of the spirit in the hope that rum can become a whisky-like drink for the more discerning (and wealthier) customer. Lascelles deMercado, the target, has the brands to match that ambition via its Appleton range.

The premium rum market is growing at 3 per cent per year, which is behind vodka but ahead of most other spirits segments, and Campari has a reputation for working acquired brands hard. It will also be hoping to improve Lascelles’ lacklustre 7 per cent operating margin by pushing Appleton through its own distribution system.

It is certainly paying enough for the opportunity. A multiple of 15 times historic earnings before interest, tax, depreciation and amortisation is ahead of the 11 times that Diageo paid for Turkish raki maker Mey Içki last year, but closer to the 16 times that Diageo paid for Ypióca, a Brazilian cachaça maker, this year. Campari justifies the price by saying that synergies should bring the multiple down to 10 times. But most of those synergies are on the revenue side, so far less reliable than cost savings.

Investors should take note of the rising prices. While Diageo and Campari differ in the rationale for their deals – the former wants new markets for its existing brands, while the latter wants new brands for its existing markets – they are paying up for relatively small makers of niche spirits. Prices are unlikely to fall. The global spirits market is far less consolidated than beer, with the top 100 premium brands representing just 20 per cent of the market by value. Given the fat margins on offer, the families that control many spirits makers have little incentive to sell. But their resolve is being increasingly tested by multinationals with little debt and a growing taste for something unusual.

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