Diageo ends year-long talks to buy Jose Cuervo tequila brand; distribution agreement between Diageo and Cuervo to end in June 2013

Nevin Barich

LONDON , December 11, 2012 (The Guardian) – Drinks giant Diageo has ended talks to buy Jose Cuervo, the world's number one tequila brand, after a year of talks.

Diageo had been expected to take a stake in the business, owned by the Beckmann family, with a view to taking full control later. The UK group is the brand's main distributor outside Mexico, but it has now confirmed the deal has fallen through, and the distribution agreement will now run out in June 2013. Diageo chief executive Paul Walsh said:

We believe that the future of the brand would be best delivered by aligning ownership of the brand with its route to market, and I have no doubt that Diageo has the best route to market for this brand.

However it has not been possible to agree a transaction which delivers value for Diageo's shareholders and therefore, by mutual agreement, we have terminated our discussions.

Analysts believe Diageo may now focus on growing its tequila brand Don Julio, although some believe it may turn its attention to US group Beam which has the number two tequila brand, Sauza.

News that the talks have been terminated has sent Diageo shares 25.5p lower to £18.61, but Phil Carroll at Shore Capital kept his buy recommendation:

The first thing we would say on this is that it has come as a surprise and we were expecting Diageo to announce that a deal had been reached. Therefore, it would appear that there must have been some level of difference in opinion over valuation. We suggest that the brand owners would be looking at the performance of the premium and above segment and Diageo at the more mainstream segment. It also suggests some level of capital discipline on the part of the Diageo management team, which we are sure would have liked to own Cuervo where it believed there was significant potential through aligning its ownership with its route to market.

So the question is does this leave a gap in Diageo's portfolio and does it seek to fill it? In answer to this, we believe Diageo will still distribute Don Julio, the ultra premium tequila brand. We do not expect it to be interested in the Sauza brand via Beam due to valuation so the likely result is that it will innovate in the space.

In terms of the impact on numbers, the deal to distribute Cuervo ends in June 2013 so the financial impact would fall into Diageo's 2014 financial year and we believe it would be relatively low margin as a distributor's margin. The majority of Cuervo sales by Diageo would be in the US too with limited impact on its other geographical divisions.

(c) 2012 Guardian Newspapers Limited.

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