Diageo’s Turkish delight (irony intended!)
When Turkey’s Islamist-rooted conservative government introduced another 30 percent tax hike on alcohol in October 2010, amidst protests from café owners and beverage producers, many market observers thought that Diageo’s then rumoured deal with Turkey’s raki maker Mey Icki would fall through. But no. Diageo agreed on 21 February 2011 to buy Mey Icki for GBP 1.3 billion (USD 2.1 billion). Given that Diageo declined to buy Swedish vodka Absolut in 2008, the Turkish move is the first multibillion-dollar deal by Diageo in more than a decade. What is more, it is indicative of a major change in policy at Diageo’s. For the first time, Diageo was prepared to spend loads of money on a drinks business in an emerging market as “complex” (ahem) as Turkey’s.
In recent years, the conservative government has raised taxes frequently and tightened regulations on the sale and promotion of alcohol.
Although the government denies there is any religious motivation behind its policies on alcohol, it’s a fact that a one-litre bottle of raki, the popular national anisette spirit, now costs about USD 35 thanks to the latest tax hike. That’s a lot to pay in a country where the minimum monthly wage is around EUR 400 according to Eurostat.
Let’s not forget: access to alcohol is becoming more and more difficult. Only in January 2011 Turkey’s Tobacco and Alcohol Market Regulatory Authority issued new rules which could have substantial impact on alcohol sales. They ban the use of drink-company names in sports clubs, restrict advertising that promotes drinking or suggests certain alcohol should be drunk with specific foods, and confine alcohol sales in stores to sequestered areas, the Wall Street Journal reported.
Still, in an economy that grew in double digits for much of last year, the picture is not uniform. On the one hand, in Turkey’s heartland, household consumption of alcohol has fallen 34 percent between 2003 – the year the ruling AKP came to power – and 2008 according to a much-quoted study by Betam, a research centre at Istanbul’s Bahcesehir University. At the same time, the number of Turkish households consuming alcohol fell to 6 percent from 8 percent. On the other hand, the Turkish market over all has been a winner for importers of premium brands. Pernod Ricard said its most popular brands, including Absolut, Chivas, Havana Club and Ballantines – though they typically sell at a premium to raki – grew 40 percent in Turkey in 2010.
Looks like Diageo will have to walk a tightrope in Turkey: they will have to avoid falling foul of the powers-that-be while protecting their domestic business.
Mey Icki has an 80 percent share in the country’s top-selling category, aniseed-based raki. But raki seems to be under pressure, if taxation and regulations are anything to go by. That’s why Diageo will have to use Mey Icki’s Turkish distribution network as a platform for the British group’s international brands, which range from Smirnoff vodka to Johnnie Walker whisky.
The deal is expected to be completed in the second half of 2011.
Diageo is paying the company’s private equity owners, TPG Capital and Actera, GBP 1.3 billion (EUR 1.5 billion) or ten times underlying historic earnings. That compares with an average multiple of about 13 for spirits acquisitions over the past decade, market observers say. Mey Icki was acquired by TPG Capital and Actera in 2006 for about USD 800 million. The seller was a local joint venture led by an association of beverage sales agents, which paid Turkey’s government USD 292 million for the company in 2003, it was reported.
Mey Icki had net sales of GBP 300 million in 2010 and underlying EBIT of GBP 120 million.
Diageo said that cost savings would be modest as it has a limited business in Turkey, mainly selling Johnnie Walker and J&B whiskies.
