Coverage: Jose Cuervo, you are a friend of mine

Nearly two years later, Diageo is finally in talks to acquire the remaining stake in Don Julio that it doesn’t already own. In exchange, the company is going to give up Bushmills whiskey.

The Wall Street Journal story by Dana Mattioli, Dana Cimilluca and Shayndi Raice had these details:

Diageo PLC is nearing an asset-swap deal with Jose Cuervo that would give the British liquor giant full ownership of a fast-growing tequila brand in exchange for its Bushmills whiskey label.

The two sides are in advanced talks for a deal that would hand Diageo the 50% of Don Julio tequila that it doesn’t already own as well as a cash payment, according to people familiar with the matter. In return, it would hand over Bushmills to Cuervo, they said.

Exact terms of the expected agreement, which could be announced as soon as next week, couldn’t be learned.

Consummation of the deal would enable Diageo to realize its stated ambition of boosting its presence in the high-end tequila segment after its efforts to buy Jose Cuervo outright fell apart nearly two years ago.

Diageo and Jose Cuervo, owned by the Beckmann family of Mexico, long had a distribution pact that terminated last year. In advance of the expiration, the two sides discussed a takeover of Cuervo by Diageo, but couldn’t ultimately agree on terms.

Bloomberg’s David Welch and Alex Sherman had this background about Diageo’s plans to expand via acquisition:

Diageo, which produces Smirnoff vodka and Johnnie Walker Scotch whisky, has been trying to grow its tequila business and adding other spirits with recent acquisitions. The company bought United Spirits Ltd. in July, giving Diageo India’s largest liquor producer.

Diageo abandoned talks to acquire all of Cuervo in December 2012. It had distributed Cuervo outside Mexico since 1997, before terminating the long-term contract last year.

The U.K. beverage company has made several tequila acquisitions, including the Peligroso and DeLeón brands. Don Julio is a premium brand of six types of tequila, including Don Julio 1942 and Don Julio Blanco.

Bushmills is an Irish whiskey founded in 1608. Diageo acquired the distillery in June 2005 for about $365 million. Diageo Chief Executive Ivan Menezes said during a conference call in July that Bushmills has underperformed in the U.S.

Michael J. de la Merced reported in The New York Times that Don Julio’s sales will help Diageo continue to grow:

But it will gain a major foothold by buying full control of Don Julio, a top-selling brand of tequila. Unlike Cuervo’s namesake spirit, Don Julio is regarded as a premium brand that commands higher prices and has benefited from a steady rise in sales in recent years. Diageo traces its history with the brand back to 1999 when its predecessor, the Seagram Company, invested in the company.

Diageo reported that its tequila sales rose 34 percent in its fiscal year ended June 30, largely on the strong performance of Don Julio.

Cuervo, meanwhile, will gain control of Bushmills, one of the biggest brands of Irish whiskey. Diageo reported that the spirit’s sales rose 7 percent in its fiscal year ended June 30.

The Journal story added that this isn’t the first deal of the year that is complicated:

This isn’t the year’s first transaction involving a complicated swap. In April, Novartis AG, GlaxoSmithKline PLC and Eli Lilly & Co. announced $20 billion in deals that allowed the pharmaceutical companies to exit some businesses while strengthening others they considered core. As part of the deal, Novartis sold its animal-health business to Eli Lilly, allowing Novartis to focus on pharmaceuticals, eye care and generics. Novartis also acquired Glaxo’s oncology unit, and Glaxo bought Novartis’s vaccines business.

James Quinn wrote for The Telegraph that tequila is one of the fastest growing spirits, making CEO Ivan Menezes’ decision a good one for investors:

And Menezes is right to focus on the US, because it has an ever-growing thirst for the clear spirit. A recent report from the Distilled Spirits Council of the United States (Discus) noted that “Americans can not get enough of Mexico’s native spirit. Since 2002, US imports of tequila have grown 83pc – an average of 5.6pc per year.”

The fastest growth has come from what Discus refers to as the “high-end” and “super-premium” brands, which have grown by 178pc and 482pc respectively. As such, it is clear that Menezes’s strategy in securing full control of Don Julio is the right one.

But will it pacify shareholders desperate for some strategic direction? Maybe, temporarily. But in truth this is one small but important piece in what is a far more complicated jigsaw.

Diageo’s share price has fallen by 13.5pc since highs above £21 shortly after Menezes took control in July 2013, thanks to a cocktail of toxic factors across its emerging-markets business.

Sales in the first quarter fell by 1.7pc, but Menezes still insisted the company’s performance was in line with expectations.

The move is likely a good one for Diageo, but it’s critical for Menezes, whose performance hasn’t been up to par. Diageo needs Don Julio, particularly to boost sales in the U.S. where Bushmills isn’t performing as well.