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Diageo Favored if Cuervo Decides to Sell

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Cuervo owners may have eye on Fortune situation, Cuervo tequila seen worth around $2 billion, Diageo shares up 0.6 pct in firmer London market

Diageo (DGE.L) is seen as the likeliest of four potential contenders to buy Jose Cuervo, the world's best-selling tequila, if the Beckmann family decides to sell the brand which analysts say could fetch $2 billion.

The secretive Beckmann family appears to be testing the water concerning a sale, analysts said, knowing that a potential break-up bid for Fortune Brands (FO.N) could put Sauza on the market, the world's second biggest tequila brand.

Diageo, the world's biggest spirits group, would be front runner to buy Cuervo due to its existing distribution rights and strong balance sheet and Chief Executive Paul Walsh has said in the past he would be interested in buying at the right price.

Jose Cuervo controls around 29 percent of the global $2.8 billion tequila market, selling around 4.5 million 12-bottle cases annually, with 60 percent of its sales in the U.S. market where it is over twice the size of its next-largest competitor.

Diageo, whose existing brands include Smirnoff vodka and Johnnie Walker whisky, distributes Jose Cuervo outside Mexico in a long-term contract which runs until June 2013.

"We would like Diageo to buy Cuervo tequila ... The current arrangement means lower margins and as a result we believe it could generate more business on Cuervo if it owned the business," said analyst Pablo Zuanic at Liberum Capital.

He calculates if ex-factory level sales are around $650 million then the price should be about three times revenue and about 10 times earnings before interest, depreciation and amortisation (EBITDA), which compares with the 9.9 times Diageo paid for Turkish drinks firm Mey Icki last month for 1.3 billion pounds ($2.1 billion).

None of the other top four spirit makers is seen as likely to buy Cuervo.

Pierre Pringuet, chief executive of Pernod Ricard (PERP.PA) has ruled out major acquisitions in the short term to focus on cutting debt after its 5.7 billion euro purchase of Absolut vodka maker Vin and Sprit in 2008.

Privately owned Bacardi, already has a minority share in the world's third-biggest tequila brand Patron, while Brown-Forman (BFb.N), the world's fourth-biggest spirits firm, owns the Herradura and El Jimador tequila brands, and Fortune is virtually ruled out by its ownership of Sauza.

"Diageo would appear to be the most advantaged potential bidder. Cuervo would also strengthen Diageo's distribution platform for Mexico which is a fast growing market for its scotch brands," said Trevor Stirling at Bernstein Research.

Analysts believe the Beckmanns may be assessing a sale ahead of a potential break-up of Fortune. Last December, Fortune said it will split off its golf and home products units to focus on its drinks business. But this in turn is seen as making the rump group more vulnerable to a takeover bid.

Analysts say the Beckmanns would have a problem if Diageo bought Fortune and with it Sauza, leaving the family a more limited field of potential distribution partners.

"Diageo now looks to be more active in M&A than it has been for over a decade. With net debt to EBITDA of 1.9 times at June 2011 forecasts, Diageo has considerable room to look at further assets," analyst Barry Gallagher at brokers Davy. ($1=.6145 pounds)

Source: Reuters UK

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