* Distribution deal with Jose Cuervo ends in June
* Diageo seeks to repeat success of Ciroc vodka for tequila
* Buying into emerging markets to counter sluggish Europe
* U.S. sales holding up despite growth dip
* Confirms mid-term guidance; hikes interim dividend
By Emma Thomasson
ZURICH, Jan 31 Diageo, the world's
biggest spirits group, signalled a more reticent acquisition
strategy following a recent buying spree, saying it wants to
develop its own tequila brand after ending talks to buy a stake
in Jose Cuervo.
Diageo will announce details later in the year of its plans
for the tequila market after it said last month it would not buy
a stake in top-selling brand Jose Cuervo, which has a
distribution deal with Diageo due to end in June.
"An organic play is the best entry into the tequila category
for us," Chief Executive Paul Walsh told Reuters television.
"The main thrust of our attention will be the creation of
our brand, not dissimilar to what we have done with Ciroc," he
said, referring to the premium vodka it launched in 2003 and
which recorded 62 percent growth in the 2011/12 financial year.
Faced with sluggish demand in recession-hit European
economies, Diageo has been snapping up brands particularly in
the growth markets of Africa, Asia and Latin America, where it
aims to make around half of its turnover by 2015.
That strategy helped the maker of Johnnie Walker whisky and
Guinness beer report sales growth of 5 percent to 6.04 billion
pounds ($9.5 billion) in the half year to December, as strong
demand in emerging markets made up for contraction in Europe.
In November, Diageo paid $2.1 billion for a majority stake
in India's largest spirits company United Spirits, and it has
also secured smaller deals for producers of baiju, cachaca and
raki in China, Brazil and Turkey.
Chief Financial Officer Deirdre Mahlan said the acquisition
was on track and she expected a response from the Indian
regulator by the end of the first quarter.
Diageo's biggest rival Pernod Ricard has said it
also plans to expand in the thriving Indian whisky market, but
will do so mostly through organic growth, chief executive Pierre
Pringuet told Reuters in an interview in November.
Walsh said Diageo would proceed with caution on any future
takeovers: "We will only do the acquisitions that we are
confident will be accretive to our growth rate and will add
value for shareholders."
Walsh declined to comment on whether Diageo will seek a deal
with U.S. group Beam, home of the world's No.2 tequila
brand Sauza as well as Jim Beam bourbon whiskey, but told CNBC
the company already had a full portfolio in North America.
SWITCH INTO DIAGEO FROM PERNOD RICARD?
Shares in Diageo, which trade at 16.8 times expected
earnings to 17 times for Pernod Ricard and 25 times for Remy
Cointreau, were up 1.5 percent, compared with a 0.4
percent firmer European food and beverage index.
"We continue to be positive on the Diageo story due to its
strong and resilient business model and its growing exposure to
faster growing markets," said Shore Capital analyst Phil
"However, we believe market sentiment may be lower in the
short-term as the M&A story becomes less obvious and uncertainty
remains over the U.S. economy in particular."
Analysts at Canaccord Genuity noted that Diageo shares have
underperformed Pernod by 13 percent in the last three months.
"Aside from western Europe, momentum is reassuring,
particularly in the light of fears about a recent slowdown in
the U.S.," they wrote in a note. "There is scope for a relief
rally here, and we would switch into Diageo out of Pernod."
Pernod, the world's no. 2 spirits group that makes Absolut
vodka and Mumm champagne, said last month it faced slowing
growth in Asia. It reports results on Feb. 14.
Underlying sales in North America, which accounts for around
a third of Diageo sales, grew by 5 percent. CFO Mahlan said
Diageo was not concerned about the unexpected fourth-quarter
contraction in the U.S. economy, in particular a weak December.
"Our team in the U.S. think this was related to the fiscal
cliff. We currently don't anticipate a change there," she said.
However, Mahlan said Diageo was not seeing an improvement in
crisis-hit southern Europe, where sales fell 19 percent in the
period, pulling sales to the region as a whole down 2 percent
despite fast-growth in Turkey, Russia and eastern Europe.
She added, though, that results in Europe had been hit by
one-off technical factors in Diageo's July-December first half,
that should not be repeated in the second half.
Underlying sales in Asia, which accounts for about 14
percent of the total, rose 6 percent, weighed down by a
contraction of the whisky market in South Korea.
Diageo reiterated its medium-term guidance - including a
targets for 6 percent average organic sales growth - saying its
confidence supported a 9 percent hike in interim dividend.