Jim Beam Gets Out Of The Faucets And Golf Balls Business.

[cowdery]

The only news here is that there has been some actual tire-kicking, and the presence of Bacardi and Suntory in the mix is interesting. I guess there is no limit to how many times you can shuffle the deck. Nobody has a perfectly-balanced worldwide portfolio, which I guess is now the industry's holy grail.

Unlike Allied-Domecq and Seagram's in the past, I don't believe Beam is looking for a buyer. Beam also has shown a deftness for the business which Diageo and Pernod seem to lack. If Beam wants to keep going it alone, I believe they can out-maneuver the would-be buyers.

If there is a deal, the current state of consolidation makes a multi-party deal inevitable. Diageo wants Jim Beam but probably can't absorb any other major Beam brands. All things considered, I don't see it happening in the near term.

[squire]

Well . . . they make good cars.

[cowdery]

The idea that Beam Inc. might be acquired got one step closer to reality today, as it was announced that talks have broken down between Diageo and the Beckmann family over Diageo's acquisition of the Jose Cuervo Tequila brand. That means there's about $3 billion burning a hole in Diageo's pocket (about what they would have spent for Cuervo) plus Beam gives them the #2 tequila, Sauza (though it's a distant #2), which they can now keep since Cuervo is going away.

The cost to acquire Beam Inc. has been estimated at about $10 billion.

At least one analyst has opined that Diageo will opt to invest in its other Tequila, Don Julio. As it is, Cuervo is so dominant in the tequila space its hard to take any competitor seriously, and I don't think Diageo has demonstrated much of an ability to grow brands. It's much better at buying them.

Where will Cuervo go? The Beckmanns have said they will distribute it themselves, perhaps through Proximo, which they own, although maybe not.

In other news only peripherally related to bourbon, Wild Turkey owner Campari has acquired the Jamacian parent company of Appleton Estate Rum.

[jburlowski]

$10 billion would be a modest premium over Beam's current market cap of $9.5B. And a big gulp for Diageo to do alone. Even with Suntory, it would be a tough deal to pull off.

Then again, money is plentiful and very cheap right now.....

[cowdery]

Agreed. And then there's this: Here's what Shaken News Daily reported earlier today. "Diageo is parting ways with Jose Cuervo, but Diageo North America president Larry Schwartz says his company will look to regain leadership of the Tequila category—either by creating its own brand or acquiring another one.

“'We’re number-one in 10 categories in North America, and our goal is to regain the number-one spot (in Tequila),' Schwartz said to analysts earlier today. 'We have an innovation machine, which will be focused on figuring out how we can compete with a 100%-agave product in the premium Tequila segment.'”

Which is mostly bullshit.

Even Sauza, at #2, is a poor substitute for Cuervo, because it's a very distant #2. He's not even speaking straight within his own statement, since 'regain leadership in the Tequila category' and 'compete with a 100%-agave product in the premium Tequila segment' are two very different things.

But you have to wonder if the Beckmanns can maintain Curevo's dominance without Diageo. If they stumble and Cuervo starts to hemorrhage share, the tequila category could burst wide open. No doubt Diageo would like to scare the Beckmanns back to the bargaining table with that kind of scenario.

Another thing is that, right now, 100%-agave tequila is pretty cheap. Most of what Cuervo sells is mixto, which is cheaper, but right at this moment not a lot cheaper. If stocks of 100%-agave start to tighten, the price difference will grow, which will send some consumers back to mixtos. I think everything at this point depends on what the Beckmann's do after June of next year. If they can keep Cuervo going without missing a beat, there isn't a whole lot anyone else can do about it. Cuervo will remain #1 by a wide margain and everyone else will be left chasing their tails.

The goal, if you want to sit at the top of the spirits business, is to have worldwide category leaders in every category. Diageo is still the unchallenged leader by that standard. But losing Cuervo means they're no longer a strategic worldwide player in tequila--Don Julio notwithstanding--and that's a blow.

Edited December 12, 2012 by cowdery