Diageo ends talks on tequila brand Cuervo

Tue Dec 11, 2012 6:14pm EST
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By Rosalba O'Brien

LONDON (Reuters) - Diageo DGE.L has pulled out of talks to buy a stake in top-selling tequila brand Jose Cuervo in a surprise move that fuelled speculation that the world's biggest spirits maker could now set its sights on smaller rival Beam Inc BEAM.N.

The collapse of discussions with Cuervo, which has a distribution deal with Diageo due to end in June 2013, will leave Diageo without a major tequila brand and Cuervo without a distributor outside its home market of Mexico.

Shares of Beam, which owns the world's No. 2 tequila, Sauza, closed up 2.8 percent at $61.56 in New York, while Diageo shares closed down 1.6 percent at 1856 pence in London. Shares of French rival Pernod PERP.PA, which an industry source said could now link up with Cuervo, closed up nearly 1 percent in Paris.

"With this development, the probability (of a deal for Beam) looks higher," said Morningstar analyst Kenneth Perkins, noting that Diageo executives have hinted in the past that Beam had some attractive assets, namely a range of bourbon whiskeys.

Faced with sluggish growth in recession-hit European economies, Diageo has been looking to tap burgeoning middle classes in Africa, Asia and Latin America, where it aims to make around half of its turnover by 2015.

A deal with Jose Cuervo, valued at about $3 billion, would have given the British group access to the emerging Mexican spirits market and a stronger product range there to go with its Johnnie Walker whisky and Smirnoff vodka brands.

Diageo, Cuervo's distributor outside Mexico, had been expected to take a stake in the business with the possibility of gaining majority control at a later date.

But the firm said in a statement on Tuesday that discussions had broken down without agreement, after the two companies had been wrangling over price for more than a year.   Continued...

Bottles of Jose Cuervo Tequila rest on a shelf in Mexico City December 11, 2012. REUTERS/Edgard Garrido