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Diageo terminates talks on 'future' of Jose Cuervo tequila brand

By Ben Bouckley , 11-Dec-2012

Diageo said today it had terminated discussion with Jose Cuervo relating to the future of the tequila brand, and that both parties will now work to ensure the orderly end of the current distribution agreement due to expire in June 2013.

Paul Walsh, Diageo CEO, said: "Diageo has had a long and successful relationship with the Cuervo brand and we are proud of what we have achieved for the brand as its distributor over many years.

"We believe that the future of the brand would be best delivered by aligning ownership of the brand with its route to market and I have no doubt that Diageo has the best route to market for this brand. However it has not been possible to agree a transaction which delivers value for Diageo’s shareholders and therefore, by mutual agreement, we have terminated our discussions."

Top-selling strategic brand

Diageo has been negotiating with Mexico's Jose Cuervo (privately owned by the Beckmann family) for months, with the firm attempting to cement a deeper relationship with the brand (beyond distributing it through its network) by taking a significant equity stake in one of its 14 top-selling 'strategic brands'.

One industry source told BeverageDaily.com today that he didn't think Diageo had been able to agree an deal to take a holding that delivered sufficient shareholder returns as yet, but that it still had a presence in tequila at the super-premium end with Don Julio, the principle market for which is the US.

"Tequila is actually seeing most growth at the super premium end," he said. "So the broader gold tequila is having a tougher period in terms of performance, so in terms of a business case [with Diageo chasing an equity stake], the firm probably realized it would have to put in considerable resources to improve brand relevance."

From Cuervo to Sauza?

BeverageDaily.com carried analyst comments yesterday stating that Diageo might not be particularly interested in a potential $10bn deal for Beam Inc., at least in the short term, given (then) ongoing discussions with Cuervo, and perhaps a lack of enthusiasm for Beam's Sauza tequila brand.

So did the source believe that today's announcement had changed things in respect of Beam? "The reasons that apply to the gold tequila part of the portfolio would also apply to the Sauza brand. So you can't assume that Diageo will simply switch its attention from Cuervo to Sauza."

Nonetheless, in business, as in politics, tough talking and bluff can pay dividends. Could this be the case in respect of Walsh's announcement above, with Diageo trying to hardball Cuervo into re-entering negotiations on different terms?

The source said he believed there might be a price discrepancy - in terms of what Diageo was willing to pay for an equity stake in Cuervo and the family's demands - but that this could still potentially change.