Diageo to Gain Full Ownership of Tequila Don Julio in Asset Swap

After years of unsuccessful talks, Diageo plc (DEO) said on Monday, it had agreed on an asset swap with the family owners of Tequila Cuervo la Rojena SA de CV to strengthens the U.K. company's position in premium tequila.

Under the deal, Diageo will buy the outstanding 50% of the upscale Tequila Don Julio brand, while ending the Mexican co-owner's right to produce and distribute Diageo's Smirnoff vodka in its home market. Diageo will also sell its Bushmills whiskey brand to the Beckmann family's Jose Cuervo Overseas and receive a $408 million payment, which it will use to cut debt.

Diageo held the international distribution rights to Tequila Cuervo's mass-market Jose Cuervo brand for ten years from 2003 and had previously sought to buy control of that business from the Beckmann family, with the last public talks ending in December 2012.

Tequila Don Julio sold 590,000 cases of in the year ended June and made £105 million ($168 million) of revenue. Diageo accounted for 345,000 of those cases and £75 million of the sales, the London group said.

Smirnoff volume and net sales in Mexico were 285,000 cases and £9 million, respectively, while Bushmills volume and net sales in the same period were 800,000 cases and £57 million.

The companies expect the deal to close early next year. Diageo said the transaction will dilute earnings per share by 0.6% in the year ending June 2015 and break even on an "economic profit" basis by year three. A spokeswoman declined to elaborate on Diageo's statement.

"This transaction delivers two key objectives for us. We have secured our position in the growing super and ultra-premium segments of the tequila category and further strengthened our global footprint by expanding our leading position in Mexico where the growth of spirits has great potential," said Diageo CEO Ivan Menezes in the statement.

Chief Financial Officer Deirdre Mahlan told reporters that Diageo doesn't expect to revive talks with the Beckmann family about buying Jose Cuervo, which sells for roughly $20, or less than half the price of the cheapest Don Julio tequilas.

Diageo said last month that third-quarter sales in Latin America and the Caribbean declined 1.4%, compared with a 7.4% slide in Asia Pacific. The company has been gradually adding emerging markets brands and companies, though it has been hit hard by plunging Chinese sales amid a government clampdown on conspicuous consumption.

In June Diageo completed a delayed deal for control of India's United Spirits Ltd.

Barclays plc previously advised the Beckmann family on their talks with Diageo and it wasn't clear if they were involved in Monday's deal.

Goldman, Sachs & Co. had previously advised Diageo but declined to comment on Monday.

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