Diageo ends talks on tequila brand Cuervo

By Rosalba O'Brien

LONDON (Reuters) - Diageo (DGE.L: Quote) 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: Quote).

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: Quote), 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.