Diageo may now set its sights on Beam Inc., which owns the
tequila brand Sauza, said Anthony Bucalo, an analyst at Groupo
Santander. The U.K. company has held talks with Suntory Holdings
about a potential joint offer for the U.S. distiller, an official
at the Japanese company said yesterday, though they aren't
currently in negotiations.
"Our expectation was that cooler heads would prevail," Mr.
Bucalo said in a report, referring to the failure of Diageo to
reach an agreement with Cuervo's owners. "The operational bright
side is that this failure to come to terms with Cuervo clears the
regulatory path in an advantageous way for Diageo on the issue of
tequila." Sauza is the No. 2 brand behind Cuervo.
Diageo will look at small brands to acquire in the premium
spirits category, Larry Schwartz, head of the company's U.S. unit,
said on a conference call today. "Acquisitions, partnerships we
might pursue," Mr. Schwartz said. "Innovation will be big."
The loss of the Cuervo distribution agreement would trim
expectations for Diageo's earnings per share from 2014 onwards by
between 2% and 3%, James Edwardes Jones, an analyst at RBC Europe,
said in a note.
"This is the first setback for Diageo we can recall in a good 18
months," he said. "We do not believe the absence of a tequila brand
materially alters the Diageo investment case." The end of talks
frees up some previously earmarked borrowing capacity for other
possible acquisitions, he said.
Diageo has distributed Cuervo outside Mexico since the U.K.
company was created by the 1997 merger of Guinness and Grand
Metropolitan, which gained the agreement through an acquisition in
1986. The agreement gave Diageo an option to buy the company. It
had hired Goldman Sachs Group and HSBC Holdings for advice in
exploring gaining control from Cuervo's family owners, the
Beckmanns, people with knowledge of the matter have said. The brand
was expected to be valued at more than $3 billion.
Cuervo will probably announce a new distribution partner,
potentially Bacardi or Pernod-Ricard SA, according to Laetitia
Delaye, an analyst at Kepler Capital Markets in Paris. Pernod
spokeswoman Stephanie Schroeder declined to comment.
Diageo is seeking growth in markets outside Europe as part of
its plan to get half of its net sales from developing markets by
2015. The maker of Johnnie Walker last month bought a stake in
India's United Spirits to gain leadership in the world's largest
whiskey-consuming nation. Cuervo generated $482 million of net
sales last fiscal year, a decline of 3%, according to Diageo. Its
largest markets are the U.S., Canada, Spain, Greece and the
U.K.
Diageo said today that it will continue to perform strongly in
North America and sees "no material impact" on first-half results
as a result of Hurricane Sandy. "Overall consumer confidence
remains positive" and retailers are optimistic about the holidays,
Schwartz said.
Operating profit as a percentage of sales can improve by 1
percentage point in North America in 2013, he said on the call.
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Bloomberg News
