May 15, 2012 / 11:46 AM / in 6 years

DEALTALK-Diageo hopes to seal tequila deal soon

* Diageo and Beckmann family close to deal over Cuervo

* Talks focus on whether Beckmanns take cash or shares

* Cuervo tequila business valued at $3.0-3.5 billion

By David Jones

LONDON, May 15 (Reuters) - British drinks group Diageo is weeks away from buying a minority stake in the owner of the world’s no. 1 tequila brand, Jose Cuervo, a business valued at $3 billion-plus, with talks focusing on whether the Beckmann family will take shares or cash.

A deal which will allow Diageo to take majority control of the business at a later date is the current favoured option as the Beckmanns are not keen on selling out completely and are eager to benefit from future growth, sources close to the talks said.

The Johnnie Walker whisky and Smirnoff vodka maker already distributes Cuervo in most big export markets outside Mexico and is talking to the Beckmanns about what happens well ahead of the expiry of its distribution contract in June 2013.

“A deal with Diageo taking a minority stake in Cuervo for cash or shares seems the most likely outcome with an agreement expected in the next six weeks,” said one source with knowledge of the situation, adding the stake could be some 20-30 percent.

When talks between the two started last year, Diageo’s Chief Executive Paul Walsh said terms of the existing deal dating back to 2002 would have to change as Cuervo is one of its lowest margin brands and was not realising its potential in the world’s biggest tequila market of the United States.

Walsh said an equity participation was the bare minimum he would accept in a new deal, and he is eager to buy the Cuervo brand outright or via a more complex route involving taking a minority stake as a way of gaining control eventually.

Analysts value Cuervo at $3.0-3.5 billion, but with over 80 percent of tequila drunk in the U.S. and Mexico, Diageo sees clear expansion opportunities as the group is pledged to increase its overall scale in fast-growing emerging markets.

”We believe a deal where the Beckmanns keep some

from of ownership but Diageo has control of Cuervo is the most likely scenario with ultimately both parties benefiting from this realigned ownership structure,” said analyst Pablo Zuanic at brokers Liberum Capital.

The Beckmanns, heirs to the Cuervo family who founded the business in 1795, have said it doesn’t need to sell but with the distribution contract due to end it may have to chose between an equity link with Diageo or switch to another big group such as Diageo’s closest rival Pernod Ricard.

Analysts say it would be a big risk for the Beckmanns to switch its Cuervo distributor in such a big market as the U.S., while Diageo is arguing that with an equity stake it would be more willing to boost marketing behind the brand.

“A deal giving Diageo an equity stake in Cuervo will allow it to put more money behind the brand and so boost its global growth,” said another source close to the on-going talks.

Cuervo has a 19 percent share of the global $3 billion tequila market twice as big as No. 2 brand Sauza, owned by U.S. group Beam and is clear leader in the world’s two biggest markets, the U.S. and Mexico.

Analysts say Cuervo’s U.S. share has declined to 33 percent from 42 percent five year ago with privately-owned Patron having a 15 percent share and Sauza 14 percent.

Diageo’s Chief Marketing Officer Andy Fennell says Cuervo’s recent performance has been disappointing especially in the key U.S. market. “Currently, Cuervo is a drag on a strong U.S. performance,” Fennell said.

The group reported underlying sales of Cuervo fell 11 percent in the last six months of 2011 compared to its North American region - where most tequila is consumed - which saw Diageo’s underlying sales up 5 percent in the same period.

Juan Beckmann Vidal, chairman of Casa Cuervo and heir to the tequila empire said last year on possible suitors, “Of course they would like to buy us but the family is very close knit, very solid and we don’t need to sell”.

The secretive Beckmanns have said little since, but analysts say they need a big spirits group to distribute globally.

Analysts say if Diageo fails to strike a deal with Cuervo then it might attempt a bid for Beam to give access to No 2 tequila Sauza, and also U.S. whiskies Jim Beam and Maker’s Mark.

Diageo is being advised in the on-going talks by Goldman Sachs and the Beckmanns by Barclays.

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