{"id":34282,"date":"2012-12-12T11:39:37","date_gmt":"2012-12-12T16:39:37","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=34282"},"modified":"2012-12-12T11:39:37","modified_gmt":"2012-12-12T16:39:37","slug":"diageo-sometimes-you-just-need-tequila-2","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/12\/12\/diageo-sometimes-you-just-need-tequila-2\/","title":{"rendered":"Diageo: Sometimes, You Just NEED Tequila"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

Sometimes, you just need<\/i> tequila.\u00a0 It\u2019s not really a matter of wanting it.<\/p>\n

Perhaps it\u2019s due to an inner self loathing, or perhaps it has something to do with the naughty fun involved with grabbing a slice of lime off the navel of a perfect stranger at a bar with your teeth.\u00a0 Whatever your reason might be, when you need tequila, you need tequila.<\/p>\n

Right now, Diageo (NYSE: $<\/span>DEO<\/a>)<\/b>, needs <\/i>tequila.<\/p>\n

\"badges\"<\/a>The world\u2019s largest seller of premium spirits pulled out of negotiations to buy Jose Cuervo, the world\u2019s top-selling tequila brand.\u00a0 Diageo currently has a distribution deal in place with Cuervo, but it is scheduled to expire in June of 2013.<\/p>\n

So, shortly after the next Cinco de Mayo, Diageo is going to find itself without a major tequila brand.\u00a0 For a global conglomerate looking to maintain and expand its presence in promising emerging markets like Mexico, that is distinctly no bueno.<\/em><\/p>\n

Diageo\u2019s shares reacted badly to the news, but it is Berkman family, the owners of the Cuervo brand, that are likely to be the real perdedores here.\u00a0 Cuervo sells a single product\u2014tequila\u2014that is only popular in Mexico and in the United States.\u00a0 And within the United States, its popularity is limited mostly to margarita cocktails in Tex-Mex restaurants and to college frat parties.<\/p>\n

Demographics are also moving against the fermented cactus juice.\u00a0 The Baby Boomers and my own Generation X moved beyond the tequila-drinking stage of their lives years ago, and today\u2019s young drunken louts tend to prefer vodka-based drinks.<\/p>\n

What\u2019s more, for a mega-distiller of Diageo\u2019s size, Cuervo\u00a0 was barely a drop in the bucket, accounting for barely 3% of company sales.\u00a0 The bulk of Diageo\u2019s business is scotch whisky and vodka.<\/p>\n

This is a long way of saying that Cuervo needs Diageo more than Diageo needs Cuervo.<\/p>\n

Still, Diageo\u2019s product portfolio is incomplete without a major tequila brand.\u00a0 This has led to speculation that Diageo might make a move on Beam, Inc. (NYSE: $<\/span>BEAM<\/a>),<\/b> the maker of its namesake Jim Beam Straight Kentucky Bourbon and of the world\u2019s number two tequila by sales, Sauza.<\/p>\n

I wrote about a possible Diageo-Beam merger last month (see \u201cWhiskey Stocks to Burn the Throat<\/a>\u201d<\/strong>) and noted that the possibility of being acquired by Diageo was one of the reasons that Beam and rival Brown-Foreman Co (NYSE: $<\/span>BF-B<\/a>)<\/b> traded at a premium earnings multiple.<\/p>\n

But Beam would be a hard acquisition for Diageo to digest.\u00a0 We\u2019re talking about a stock with a $10 billion market cap (the Jose Cuervo deal that fell through was reportedly worth only $3 billion).\u00a0 Even for a $74 billion company like Diageo, that\u2019s a lot of pesos for tequila market share.\u00a0 (If Diageo did decide to make a bid for Beam, tequila wouldn\u2019t be the primary motivation.\u00a0 Beam\u2019s bourbon brands are far more valuable.)<\/p>\n

Diageo isn\u2019t left completely\u00a0 high and dry in the tequila war. \u00a0It still owns the Don Julio brand, which competes with Patron at the premium level where margins are higher.<\/p>\n

But with Cuervo slipping away and a Beam merger unlikely at this time, Diageo may simply have to be content with wearing a smaller sombrero for now.<\/p>\n

Disclaimer: Sizemore Capital is long DEO and BEAM. This article first appeared on InvestorPlace<\/a>.<\/em><\/p>\n

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The post Diageo: Sometimes, You Just NEED Tequila<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

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