Olly Wehring

Analysis - Diageo's Mey Içki Talks and the US$2.5bn Elephant in the Room

By | 10 December 2010

Speculation has started circulating this week that Diageo may be looking to snap up Turkish spirits company Mey Içki from private equity firm TPG Capital. While Diageo won't be drawn on the rumours, and TPG Capital were unavailable for comment all day today, it's not hard to work out where these rumours stem from.

US-based TPG claims it is “a leading global private investment firm”, and has around $47bn of capital under its management. In 2006, it bought Mey Içki – the domestic market leader in raki, as well as Turkey’s biggest producer of wine, vodka and gin – for around $800m. Since making the buy, TPG has cut the company's number of facilities by more than 50%, recruited more experienced management and rebranded several of the company's products. Then, earlier this year, the Financial Times reported that TPG was considering either an IPO or all-out sale of Mey Içki.

Diageo's name is never far away from the top of any list of buyers, when divestment rumours surface, so it isn't all that surprising that people “familiar with the matter” were cited by Reuters today as claiming that the two are holding discussions, and that Diageo would be prepared to pay up to US$2.5bn for Mey Içki.

Now, I wouldn't expect anyone from Diageo to go leaking numbers. Would you?

In spite all of this, there is every likelihood that the two sides are talking. But, there is a big old elephant in the room, which would suggest that the talks are very much at the cursory stage, if they're that advanced at all.

Diageo has been in dispute with the Turkish authorities for around six years – six years - and there's no definite end in sight. The issue that is causing disagreement is that of transfer pricing – where a product enters a country destined for the domestic market is bought at one price, and the same product for that country's duty free channel is bought at a lower price.

The Government wants the two prices to become one – the more expensive one. And, that means that Diageo owes the authorities a boat-load of duty - as do all spirits companies who import into Turkey. Diageo, obviously, doesn't agree with the authorities, even going so far as to threaten to quit the country altogether in 2006.

Media reports out of Turkey in recent weeks, however, have suggested that a resolution of the matter could be imminent, with the Government rumoured to be poised to present a bill in a matter of weeks. However, as our own source “familiar with the matter” notes, we have been down this road before, with such a bill having been mooted several times before in the last four years.

Until any such resolution is reached, Diageo's 'talks' with TPG Capital could be little more than a nod across a lobby.

Sectors: Mergers & acquisitions, Spirits

Companies: Diageo

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Analysis - Diageo's Mey Içki Talks and the US$2.5bn Elephant in the Room

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