This week we are looking at Diageo, one of the world’s largest alcoholic beverage companies, following its $1bn offer for an upmarket tequila brand that was co-founded by actor George Clooney. The acquisition of the tequila brand, Casamigos, will initially cost Diageo $700m, and potentially an additional $300m after assessing the performance of the brand over the next decade.
Diageo is currently spread across 21 geographic regions with brands across every category but its main focus has long been premium spirits, with a leading position in the US. Casamigos has grown rapidly since it was launched in 2013 and according to the Distilled Spirits Council of the United States, sales of super-premium tequila are up by more than 700 percent in the US since 2002. Diageo plan to expand the successful brand to countries outside the US, with the hope of penetrating overseas markets – something that remains a key area of focus for CEO, Ivan Menezes, who is also keen for Clooney and his co-owners to remain with the company after the acquisition.
Diageo remains an attractive stock given the long term prospects for expansion to emerging markets, outstanding collection of global brands (including Guinness, Smirnoff and Johnnie Walker), strong management led by Menezes and a good dividend yield. However, Diageo are not expecting Casamigos to be accretive to earnings for another three years, and it will be interesting to see how they go on to build the brand both in the US and overseas. Recent share price performance has remained strong and we continue to be mindful of the price we pay for stocks.