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Diageo's bet on Don Julio Tequila applauded by analysts

Published:  10 November, 2014

Last week Diageo announced it agreed to acquire Don Julio Tequila in exchange for its Bushmills Irish whiskey brand with Jose Cuervo in a move that has been widely applauded by analysts.

Don Julio AnejoDon JulioDon Julio will soon be globally owned by Diageo

Last week Diageo announced it agreed to acquire Don Julio Tequila in exchange for its Bushmills Irish whiskey brand with Jose Cuervo in a move that has been widely applauded by analysts.

Euromonitor's senior alcoholic drinks analyst Jeremey Cunnington sees the deal as a win-win for both parties. "The deal does make strategic sense for Diageo as well as Casa Cuervo," he said in an analysis piece.

The US market plays a critical role in the growth of the Don Julio brand according to Cunnington. Whiskey is growing in the US, but Bushmills has struggled to make any headway in that market with the brand's market share dropping from 17% in 2008 to just 8% in 2013.

Additionally Moody's international credit rating agency also sees the deal as a win for Diageo.

"Diageo expects the ultra-premium category to constitute at least half of total tequila growth in the coming years in the US. Don Julio reported organic volume and revenue growth of 26% in the fiscal year ended 30 June 2014, and generated £105 million of revenues. Meanwhile, Bushmills, the second-largest Irish whiskey brand globally, generated revenues of £57 million in the same period, a 7% increase over the year-earlier period, on 8% volume growth," according to a Moody report from Paolo Leschiutta, vice president senior credit officer.  

Don Julio will soon be globally owned by Diageo

Further the report said: "The acquisition is credit positive for Diageo because it intends to apply the proceeds of the transaction to reduce debt.  It will also consolidate its presence in the fast-growing ultra-premium tequila segment."

The other benefit for Diageo is that Don Julio will be the first Tequila brand in the company's portfolio. Diageo currently offers more than 100 Scotch, Irish, Canadian and American whiskies, including icon brands like Johnnie Walker.

Super-premium Tequila in the US has grown 83% since 2002 through 2013, according to the Distilled Spirits Council of the US.  High-end premium Tequila grew by 178.4%, while super-premium Tequila grew by 481.8% during the same period. Don Julio is the market leader in the ultra-premium segment.

Diageo will receive $408 million from Jose Cuervo for Bushmills as well as full global ownership of Don Julio brand and will end the distribution deal of Smirnoff in Mexico by Jose Cuervo.  In turn, Diageo has agreed to sell Bushmills to Jose Cuervo Overseas.

The deal is expected to be completed in early 2015.

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