In acquiring 50%-ownership and global distribution rights to premium vodka brand Ketel One Diageo confirmed its withdrawal from the auction for Absolut. Moreover, writes Ben Cooper, the move for Ketel One suggests the global market leader plans to give whichever company eventually wins Absolut a true run for its money in the premium vodka category.

The partial purchase of premium vodka brand Ketel One by Diageo last week for US$900m had implications for its principal competitors beyond the further expansion of an acquisitive market leader. Crucially, the deal signalled the end of Diageo's interest in Absolut, the much-coveted vodka brand being sold off this year by the Swedish government.

Diageo's withdrawal from the Absolut auction means that three drinks companies remain as the front-runners for the brand, Pernod Ricard, Bacardi and Fortune Brands, which distributes the brand in the all-important US market. Two private equity firms, Investor and EQT, are also eyeing V&S Group.

In spite of its huge financial clout, Diageo had always been considered something of an outside bet to win Absolut by dint of the significant competition issues it would have to reconcile. But it had expressed an interest in the brand and had always been included by analysts in any list of potential bidders.

Diageo's chief financial officer Nick Rose had said in January that the company was interested in Absolut but said it was not a "must-have". First-round bids were due on 24 January, and it has now emerged that Diageo did not even submit a bid.

CEO Paul Walsh summed up the rationale behind Diageo switching its attentions to Dutch-produced brand Ketel One. "We will no longer be in the Absolut process; we are acquiring a brand which we believe has greater potential which we can control rather than take part in a process we cannot control," Walsh told Reuters at the time of the deal.

And there is a strong feeling among observers that demurring from the Absolut race in favour of Ketel One does indeed represent a better option for the group. Not only does it avoid the competition issues of an Absolut acquisition, it also means Diageo will be free from the distractions the ensuing auction would have created - and to which its competitors will undoubtedly be subjected - free to set about taking Ketel One into a new phase of global development.

Diageo clearly feels that Ketel One can perform the same function within its portfolio as Absolut might have done. No one would pretend that Ketel One is in the same league as Absolut, which as an iconic, enduringly trendy, global brand in a growing category must be the object of many a marketer's most fevered fantasies, but it does tick a good few of the boxes.

It sells 1.9m cases, with 97% of its sales in the US, and will fit well between Diageo's principal and market-leading vodka brand, Smirnoff, and its ultra-premium offering Ciroc.

Ketel One's strong presence in the US is of course hugely significant. As a Diageo spokesperson told just-drinks after the deal was struck, "We think there is lots of room to improve this brand because we have fantastic distribution in the US."  But equally important is what Diageo will be able to offer the brand globally. As part of the deal, Diageo has global distribution rights to the brand and will now set about building it internationally. Given the dominance of the US in its sales profile at the moment, there is clearly no shortage of room to grow in other markets. The company has said it plans to roll out the brand out in South America, Asia and Europe.

The fact that Diageo has paid $900m for 50% of the company that now owns the brand - the Nolet family was reluctant to sell the brand outright - underlines Ketel One's premier-player status and shows that Diageo has complete faith that it can take the brand further.

Whether the deal has implications for the price the eventually successful bidder might have to pay for Absolut remains open to question. On the one hand, it could be argued that Diageo scaling up its presence in the premium vodka category removes a little bit of lustre from the Absolut prize, and will make life a little tougher for the eventual winner. Looked at another way, however, an effective valuation of $1.8bn for Ketel One further confirms just how valuable premium vodka brands are, and Absolut is at the top of the tree.

Analysts currently expect Absolut, which sells around 10.7m cases a year, to fetch $5bn to $6bn, and some believe the Ketel One deal will boost the Swedish brand's auction value. Citigroup analyst Philip Morrissey points out that Diageo is paying 18 times historic EBIT earnings for its 50% while Bacardi paid 26 times for Grey Goose in 2004. He believes the Absolut multiple could be nearer that of Grey Goose than Ketel One.

If the Ketel One deal can be interpreted as a statement of intent on Diageo's part, the timing of the announcement is also interesting. Indeed, in an extremely busy two weeks or so the group is certainly demonstrating its ability to "multi-task".

Only two days after sealing the Ketel One deal, Diageo announced it had signed a three-year global distribution and joint marketing deal with Industrias Licoreras de Guatemala for the Zacapa rum brand.

The deal comes into effect on 1 April, the day after the Ketel One deal is scheduled to close, and includes an option to buy 50% of the brand after three years, subject to performance. The Zacapa rum portfolio includes Zacapa Centenario 15, Zacapa Centenario 23 and the ultra-premium Zacapa Centenario XO. The US, Mexico, Chile, Spain, Japan and global travel retail are its principal markets. Rather like the plans for Ketel One, Diageo said it intends to "build the brand to upgrade its brand profile and introduce it to new markets".

All this activity came shortly in advance of publication of the group's interim results today which also seem to put the group in a positive light. Diageo met market forecasts, posting a 7% rise in half-year sales, in organic terms, to GBP4.29bn, and a 9% jump in operating profit to GBP1.41bn. Pre-tax profits rose by 5.3% to GBP1.37bn. The company raised its interim dividend by 5.2% to 13.2 pence.

Diageo shares rose by 2.9% to 1,064 pence in early trading, though this was primarily attributed to analysts raising their forecasts on the back of Diageo's prediction that the strength of the euro would offset dollar weakness and mean no impact from foreign exchange at the full year. Credit Suisse raised its forecast for the company's 2008 earnings by as much as 4%.

So, with the Absolut battle off Diageo's horizon, the drinks giant can now focus on what it has got, rather than what it could have got. Meanwhile, any effect the company's recent moves will have on the V&S auction should be clear sooner rather than later. The auction process looks set to complete before the end of June.