Whisky Focus - Diageo Swap Bushmills Irish Whiskey For Don Julio Mexican Tequila

Diageo has agreed to swap its Bushmills Irish whiskey label for full ownership of the high-end Don Julio tequila, as the British drinks group seeks to regain its leading position in tequila and build a bigger portfolio of "reserve" brands.

The world's largest spirits maker said that it had agreed a deal with the Beckmann family of Mexico to take the 50% of Don Julio it does not already own in exchange for its Bushmills Irish whiskey.

Diageo did not give the full financial terms of the deal, but analysts at Nomura estimate its total consideration at £440million ($704 million).

Don Julio is the top-selling "ultra-premium" tequila in the United States, with bottles ranging from $45 to $375. In the year to June 30, its sales jumped about 27%.

That is an attractive clip for Diageo, whose sales are sagging amid a sharp slowdown in some emerging markets that has been only partially offset by the strength of higher-margin "reserve brands" such as Johnnie Walker Blue Label, Ciroc Vodka and Zacapa Rum.

While Bushmills is a well-known label, it carries a more modest price tag, competing with the much-larger Jameson brand, owned by Pernod Ricard. According to investment bank Nomura, it was never a huge focus for Diageo, given its large presence in Scotch whisky.

MEXICAN WAVE

Under the deal, Diageo will also get a $408million payment and the right to distribute Don Julio and its Smirnoff vodka in Mexico, boosting its position in a country whose economy is growing, along with its pool of middle-class drinkers.

"We have been talking about our strategy in emerging markets for some time, and this transaction is a deliberate step in the execution of that strategy," Diageo Chief Financial Officer Deirdre Mahlan told reporters, referring to a history of buying local spirits makers in emerging markets, and using them as a platform to sell its international brands.

That strategy has given Diageo a larger exposure to volatile markets, shaken up in recent quarters by a recession in Brazil, a government crackdown in China and currency weakness in India.

"Given the mixed experience with recent acquisitions, buying the Mexican tequila Don Julio may look a safer deal," said Nomura, as Diageo already owned half of it. Buying the brand outright means control over marketing, pricing and expansion.

The deal does not include the Beckmann's Jose Cuervo brand, and Mahlan said there were no discussions about it either.

The world's largest spirits maker used to sell Cuervo, the world's largest tequila brand, outside of Mexico, but let the distribution agreement expire in 2012 after failing to reach a deal with the Beckmanns to buy it. Despite the disagreement over Cuervo, Diageo and the Beckmanns kept their 50/50 joint ownership of Don Julio.

Since losing Cuervo, Diageo has said it preferred to focus on higher-end tequilas, such as those made from 100% blue agave. Earlier this year, it announced the acquisitions of two small high-end tequila brands, DeLeon and Peligroso.

The deal for Don Julio is expected to close in early 2015 and should be break even at the profit level by the third year, Diageo said, adding that the transaction would dilute earnings per share by 0.6 percent in the full-year to June 2015.

In the year ended June 30, Don Julio sold 590,000 9-litre cases and had net sales of £105million ($168.0 million), while Bushmills sold 800,000 cases and had net sales of £57million ($91.2 million).
 

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