Diageo May Seek to Acquire Jose Cuervo

Includes: BF.B, DEO
by: Zacks Investment Research

Diageo Plc. (NYSE:DEO) is reportedly eyeing the buyout of world's leading tequila producer Jose Cuervo. The owner of Smirnoff vodka, Diageo has valued Jose Cuervo at $2 billion for the acquisition.

London-based Diageo, and producer of premium quality spirit under famous brands such as Johnnie Walker whisky, already enjoys distribution rights for Jose Cuervo.

Diageo may have to compete with companies like Bacardi, Pernod Ricard and Brown Forman (NYSE:BF.B) who might be interested in the acquisition of Jose Cuervo. However, the spirit giant is in a much sound position as it already owns the international distribution rights for Jose Cuervo.

The Jose Cuervo Golden Margarita, marketed by Diageo PLC, ranks number one in the category, which generated about $218 million in sales at retailers over the past year. Cuervo and Diageo had signed a joint venture in 2003, with the former paying $100 million for a 50 percent stake in Diageo’s Don Julio tequila brand. Diageo launched a national marketing campaign under the name 'Cue the Cuervo', for the Jose Cuervo tequila across the US. The campaign displays Cuervo as a night-time party drink in both the off- and on-trade.

Diageo is on an acquisition spree presently. According to company sources, management froze share buybacks in order to divert funds for takeovers based on the firm's reliance on European and North American markets. Last month, Diageo had agreed to buy Turkish spirits maker Mey Icki for $1.3 billion while it has also been linked to one of Poland's largest vodka companies, Stock Spirits, selling under brands like Czysta de Luxe.

After the deal in Turkey is completed, more than 35% of Diageo’s revenues will come from emerging markets. The group has a strong presence in Africa and in Latin America and management predicts that in four to five years the company’s emerging markets’ revenue share will exceed over 50%. The biggest potential takeover targets in Diageo’s sights are American and French spirit companies.

Currently, we maintain a Neutral rating on the stock. Further, Diageo holds a Zacks #3 Rank, which translates into a short-term Hold rating.

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Tagged: , Beverages - Wineries & Distillers
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