In the Spotlight – Diageo & Cuervo: Yes way, Jose?
Expect to see a photo of Diageo's Paul Walsh shaking the hand of Juan-Domingo Beckmann some time soon
A recent spurt of speculation regarding Diageo and Jose Cuervo has not gone unnoticed. just-drinks, however, decided to let the talk subside a little before covering the rumours. After all, we've heard it all before in the last 12 months.
It's been almost two weeks since the chatter around Diageo and Cuervo started getting louder. In an interview with the Wall Street Journal at the end of March, CEO Paul Walsh was asked about the Tequila brand, which is owned by the Beckmann family and distributed by Diageo. His responses led to even more talk about the future for Cuervo, whose distribution deal with Diageo will expire in June next year.
"I have a lot of admiration for the Cuervo brand,” Walsh told the WSJ($). “But, I think it is a brand that is not realising its full potential.
“Equally, it is a brand from which we derive limited margin as a distributor.” Walsh told the paper he feels that the brand is “not fully paying its rent”.
As a result of the interview, the press started digging; even if Walsh's comments didn't throw up anything new. Back in November, Walsh told a group of journalists – just-drinks included – that he would only renew the partnership with “some revision”.
“(I would) much prefer to have more of an equity participation than being a pure distributor for Cuervo,” Walsh said at the time.
Then, last weekend, UK newspaper the Telegraph reported that Goldman Sachs has been instructed by Diageo to close talks with the Beckmanns, ahead of a stake sale in Cuervo.
Again, this has happened before: Back in March last year, the Sunday Times claimed that the Beckmanns were in discussions with Barclays to “explore a possible sale of all or part of the group”. We at just-drinks weren't impressed by this story at the time, suggesting that the Beckmanns were merely sending a flare up, to see the lay of the land.
Developments in the US between March last year and March this year, however, suggest that, this time around, the reports contain more substance. The birth of Beam Inc in October has brought another major Tequila brand into the equation, and has turned the spotlight squarely on to the Beckmann family.
Most industry observers feel that Beam is a takeover target somewhere down the line for the likes of Diageo and Pernod Ricard. Should Diageo team with another player to buy Beam – anti-trust issues mean it would struggle to go it alone – to lay claim to Sauza, then whither the Beckmanns?
The Beckmanns will now be the keener party to resolve the matter, and quickly: I'd wager that we'll see a transaction of some kind complete before the end of the summer. But, what kind of transaction? When dealing with a family-owned company, sentiment plays a large part: No-one wants to be the person who 'sold out' the legacy.
Rather than a cash deal, then, we see the Beckmanns going for a stake in Diageo in return for a stake in Cuervo. After all, ask yourself which sounds better around the dining table: “We are the largest stakeholder in the largest spirits company in the world”, or “Look at that pile of cash we got from selling our great-great-great grandfather's life's work”?
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