Diageo's $1bn acquisition of George Clooney tequila 'might be a bargain'

Diageo has agreed to acquire super-premium US tequila brand Casamigos for $1bn from actor George Clooney and other founders, which may disappoint investors who expected the drinks group to announce a cash return instead.

The FTSE 100 group announced the deal overnight, paying an initial $700m plus a potential $300m over 10 years dependent on performance, stating it believes that Casamigos can play a complementary role alongside its other main tequila brand, Don Julio.

Jonny Forsyth, a drinks analyst at Mintel, said while the price "does look very high" Diageo has been very successful before using the celebrity-spirit owner model, such its partnerships with rapper and producer Sean 'P Diddy' Combs's for Ciroc vodka and ultra-premium tequila brand DeLeón.

Since being founded in 2013 by Clooney, ex male model Rande Gerber, and luxury property developer Mike Meldman, Casamigos has shown a compound annual growth rate of 54% in the last two years, reaching sales of 120,000 cases in 2016 primarily in the US and is on track to reach over 170,000 cases by the end of 2017, Diageo said, making it the fastest growing drink in what is one of the industry's highest growth categories.

The deal is expected to close in the second half of calendar 2017 subject to regulatory clearances and Diageo expects the transaction will be neutral for earnings per share for the first three years and accretive to EPS thereafter.

Chief executive Ivan Menezes said: "We are delighted to announce this transaction today to extend our participation in the tequila category. It supports our strategy to focus on the high growth super-premium and above segments of the category.

"With the global strength of Diageo we expect to expand the reach of Casamigos to markets beyond the US to capitalise on the significant international potential of the brand. We look forward to building on the remarkable success of Casamigos to date."

in 2014 Diageo teamed up with Combs to buy ultra-premium tequila brand DeLeón, which retails at $120-$1,000 a bottle and at the time sold just 10,000 cases annually, on the back of a 50/50 joint venture for Cîroc vodka, which has ships more than 2m cases up from 50,000 a year initially.

Shares in Diageo fell almost 1.4% to 2,342p by mid morning on Thursday.

PRICE 'DOES SEEM HIGH' BUT DIAGEO HAS GOOD FORM

With Diageo expecting the acquisition to be economic positive in the fourth full fiscal year post completion, broker Shore Capital believed "it is hard to argue the acquisition is a ‘steal’ but on the face of it Diageo is adding a high growth brand in a market category that is currently buoyant especially at the premium end".

Analyst Phil Carroll said: "The valuation of this deal may disappoint those investors who were expecting Diageo to announce capital returns guidance as leverage was coming down albeit we believe this was at least another year away without deals and assuming trading remained solid overall.

"Our view, is that good brands in strategic growth categories are going to command high valuations. We believe this deal highlights Diageo to be focused on strengthening its position in a growth category in its most important market."

Mintel's Forsyth said while the price seemed "very high", it includes the marketing and the celebrity pull factor of Clooney and his rich friends. "Given that, it might be a bargain."

He noted that Diageo's Cîroc deal underlined how Diddy is a proven influencer of sales and cultural trends, with 12.3m followers on Twitter alone, with a particular influence among African Americans, a group currently under-index on tequila consumption compared to other ethnic groups.

Forsyth said Diageo has high hopes for luxury tequila, a category that is doing very well in the US and has global potential, but was not always seen as a premium tipple.

"Back in the 1980s and 1990s, the drink was seen as cheap fodder to be consumed either in a shot glass or a margarita. However, recent innovation has now added quality credentials."

He observed that instead of ordering generic tequila, Americans are now choosing among Añejo (oak barrel aged), blanco (white), plato (silver), 100% agave, or the increasing array of flavoured tequilas.

"Many brands also have an interesting story to tell, including small batches and traditional production techniques that lend tequila an authentic charm. In fact, data shows that tequila attracts wealthier Americans more efficiently than any other spirit type."