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Beam Inc. deal more likely after Diageo terminates Cuervo talks: City analyst

By Ben Bouckley , 11-Dec-2012
Last updated on 11-Dec-2012 at 12:36 GMT

A City analyst tells BeverageDaily.com that he believes recent talk of Diageo mounting a $10bn+ takeover of Beam Inc. is more likely now the UK plc. has ended talks with Mexico’s Jose Cuervo.

We broke this news early this morning , with Diageo CEO Paul Walsh stating that despite his firm’s interest in buying the tequila brand, both parties had “terminated discussions” by mutual agreement.

On condition of anonymity, one City analyst told us this morning: “We saw that Beam Inc. story at the weekend , and are now inclined to wonder, was that Diageo putting it out there to the Beckmann family? Saying, ‘listen guys, either sign the deal as is, or we’ll just go and buy Beam’, and the family didn’t fall for that?’

“Certainly everyone in the market will now ascribe a higher probability that Diageo will look at Beam Inc., either in concert with another player, perhaps Suntory, Brown Forman or private equity.

“What this also does is improves Beam’s marketing power. They’re probably saying: ‘OK, what were we going to settle for, 24 P/E, is it 26 P/E?

Strengthens Beam’s hand

“If Beam is selling Jim Beam, Maker’s Mark and [key tequila brand and Cuervo rival] Sauza – say if that’s what Diageo wants – then Diageo is going to have to pay up for that,” the analyst added.

Another industry source told BeverageDaily.com this morning that Diageo was perhaps only interested in the super premium end of the tequila market, where its Don Julio brand played.

But the analyst disagreed: “In reality, Cuervo is the fourth-largest brand that Diageo has in the US – with something like 3.5m cases [shipped per year].

“OK, they don’t make enough money out of it, in terms of the distribution margins that they make. But still it’s a big, big brand.”

Only Smirnoff, Captain Morgan’s and Crown Royale were bigger in the States for Diageo, he added.

Diageo disliked ‘brand economics’

“Tequila is a significant category – 7% of the overall spirits market. It’s easily matches the scotch category. Diageo wasn’t making enough profit out of it – they wanted more out of the economics of the brand,” the City analyst said.

“So to throw away that position is significant. Well, perhaps not throw it away. But the Beckmann family [which owns Cuervo] probably just said ‘we’re not giving you enough’.

“So in terms of the return metrics that Diageo has, they decided that things weren’t going to work out for either party.

“What is does mean is that Diageo no longer has exposure to the category. OK, it has Don Julio, but that brand is quite small as a super-premium brand.”

Would the end of its distribution agreement with Diageo next June hurt Jose Cuervo as a brand?

“Yes – but does Pernod step into the breach, Bacardi perhaps? Cuervo has other options as well. It is the seventh largest spirits brand in the US,” the analyst said.

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