Diageo takes full control of Don Julio tequila

Drinks company Diageo has taken full control of tequila maker Don Julio with an asset swap that will see the FTSE 100 group hand over its Bushmills Irish whiskey brand in return and also receive $408m (£256m).

Diageo, the world’s biggest drinks company, has confirmed that it will take on the 50pc of Don Julio it does not already own from Mexico’s Beckmann family.

The deal highlights Diageo’s ambition to strengthen its position in growing markets as sales slow in other areas.

“Mexico is an important emerging market,” said Deidre Mahlan, chief financial officer. “This transaction is a deliberate step in executing that strategy.”

Tequila is the largest spirit market in Mexico and Don Julio’s premium status will tap into the country’s increasing prosperity, she said, adding that more that half the country’s population is middle class, and that Mexico’s GDP is expected to grow 4pc for the next two years.

Disposing of the Bushmills brand will not harm Diageo, she said. “We don’t see it as losing anything,” Ms Mahlan said. “Bushmills has been a good brand but our collection of whisky brands gives us the breadth to participate in all consumer occasions.

“The size of the tequila market globally is much bigger than Irish whiskey... this is an opportunity to grow within an important emerging market.”

Sales of Don Julio sales increased by more than a quarter this year and Diageo expects the spirit to continue “strong double-digit growth” as Mexican and also US consumers continue to develop a taste for premium tequila.

Under the terms of the deal Diageo will take full global ownership and control of Don Julio, and will regain the ability to distribute and produce its Smirnoff brand in Mexico, ending a contract it had with the Beckmann family’s company.

Diageo said the deal is expected to complete early next year and will reduce earnings per share by 0.6pc in the 2014/15 financial year. The company expects the arrangement to break even in the third year after it closes.

The agreement means Diageo has control of a company it has targeted for several years. In 2012 the FTSE 100 group attempted a £2bn deal to buy the whole to Jose Cuervo but the two sides could not agree terms.

In the wake of the failed purchase, Diageo stepped up its marketing to boost sales of Don Julio. It also looked to grow in the tequila market by forming a joint venture with rapper and entrepreneur Sean Combs – also known as P Diddy (pictured) – to buy tequila brand Deleon. It also purchased Peligroso, another high-end tequila.

Ivan Menezes, chief executive of Diageo, said: “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.”

Diageo said details of the transaction were confidential but disclosed that Smirnoff volume in Mexico last year was 285,000 cases and with net sales of £9m. Bushmills volume and net sales in the same period were 800,000 cases and £57m.

Last year Tequila Don Julio had volume and net sales of 590,000 cases and £105m, of which Diageo accounted for 345,000 cases and £75m.