Diageo walks away from deal with Jose Cuervo
You win some, you lose some. Diageo, the world’s number one drinks company, may have been successful at clinching a USD 2.1 billion deal for a majority stake in India’s largest spirits company, United Spirits, in November 2012, but ultimately failed to secure a takeover of Jose Cuervo, the world’s top-selling tequila brand, which is to stay with its Mexican owners, the Beckmann family.
Apparently, the two sides failed to agree on a price. The Cuervo brand reportedly carried a price tag of over USD 3 billion – too high for Diageo.
The collapse of discussions with the Beckmanns in December 2012 leaves Diageo without a tequila brand as of July 2013, when the distribution agreement between the two comes to a close after 27 years, and the Beckmanns without a distributor for Jose Cuervo outside its home market of Mexico.
Profit-wise, Diageo will not be hit too hard. Analysts say that the Cuervo brand only accounted for about 3 percent of Diageo’s revenues and 2 percent of profits. Cuervo generated GBP 300 million (USD 482 million) of net sales this past fiscal year, a decline of 3 percent, according to Diageo. Its largest markets are the U.S., Canada, Spain, Greece and the United Kingdom.
But the appeal of the brand was strong, thanks to tequila’s growing popularity in the U.S. market and Cuervo’s leading position there. Its volumes in recent years were nearly double those of its nearest competitor, says the Financial Times.
Armchair strategists have already pointed out that the Beckmanns may now link up with France’s drinks group Pernod Ricard. Pernod sells small, high-end tequila brands, but like Diageo, does not have a mass-market brand in its portfolio.
Diageo, meanwhile, is rumoured to have set its eyes on Beam, the stock market-listed drinks group which was spun off from the consumer goods conglomerate Fortune Brands in October 2011. Beam is home to the number two tequila brand, Sauza, as well as several bourbon brands like Jim Beam, Maker’s Mark and Knob Creek. With a market capitalisation of nearly USD 10 billion Beam might prove too expensive for Diageo. Also, anti-trust concern could become a big hurdle.
Besides, Beam has a long tail of brands, many of which would have to be sold off. While Diageo could team up with another drinks group, for example Suntory of Japan, to carve up the portfolio, some bankers warn that this would be a messy undertaking.
For the time being, Diageo will just have to make do with what it’s got.
