Diageo is edging towards a deal with the owner of Jose Cuervo tequila which could see the spirits group take a minority stake in the $3 billion-plus valued tequila brand, people familiar with the situation said.
Diageo chief executive Paul Walsh has said he wants control, or a route to control, of a brand owned by the secretive Beckmann family and a deal for a small stake is anticipated and could be concluded by the early summer, they added.
The maker of Guinness, Smirnoff vodka and Captain Morgan rum already distributes Cuervo in most big export markets outside Mexico and has been in talks with the Beckmanns about the brand's future when a long-term distribution contract ends in June 2013.
"The most likely scenario is that Diageo takes a minority stake and then looks to increase its influence over time and gain control of this valuable brand," said one banking source with knowledge of the situation today.
Diageo is keen to strike a deal by this summer well ahead of the end of the distribution deal, and Mr Walsh has been clear that a renewal of the current distribution contract is simply not an option as the group does not make enough profit from the brand.
His minimum requirement is an equity stake in the business, but he would be willing to buy the whole company at the right price so it can start to plan its future marketing investment to grow the tequila brand.
Cuervo is the global market leader in tequila with a 19 per cent share, twice the size of the second biggest brand Sauza and by far the leader in the main tequila markets of Mexico and the United States, which account for 81 per cent of Cuervo's global volumes.
Talks between Diageo and the Beckmanns are said to be going well with some predicting a deal may be concluded in May to mark a second emerging market deal in a year after Diageo bought Turkey's Mey Icki last August for £1.3 billion.
Analysts say if Diageo is unsuccessful with Cuervo then it might be tempted into a breakup bid for US group Beam, the owner of Sauza which was created as a pure-play spirits group from the Fortune conglomerate last October.
They stress that Diageo has a good recent track record of investing in spirits brands in emerging markets with small stakes initially and then slowly increasing its influence over time, as happened with Zacapa rum in Guatemala, China's Sichuan Shuijingfang and Hanoi Liquor in Vietnam.
These deals have helped Diageo increase its sales from emerging markets to around 38 per cent of its total by the end of 2011 as it looks to match Mr Walsh's target to get half its sales from these fast-growing markets by 2015.
It has shown discipline with potential deals when it walked away from a link-up in 2009 with India's biggest liquor maker United Spirits, controlled by tycoon Vijay Mallya. Then it was offered a small minority stake at a high price and did not see a way to increase its influence over time.
Cuervo has suffered due to uncertainty, with the end of the distribution deal looming, and it saw the biggest sales decline among Diageo's key 11 strategic brands with revenues tumbling 12 per cent in the its half-year to end-December 2011.
Analysts suspect Diageo had been cautious in committing marketing spend behind a brand that it could potentially lose next year, and say Cuervo is certainly not realising its growth potential at the moment.
Reuters