Comment - Diageo Beefs up Europe with Turkey Dinner
Diageo has digested its deal to acquire Turkey's leading spirits company, Mey Icki, and the move gives it important new weight in Europe.
Diageo's business in Europe has spent the past twelve months in the doldrums, arguably too reliant on basket-case economies in Greece and Ireland and on nervous consumers in Spain and the UK. Yes, there have been glimmers - Germany and Russia, mainly - but, overall, Diageo's European operations have been forced to watch the emerging market party from the street outside.
Enter Turkey; or rather, Mey Icki, which Diageo acquired for US$2.1bn earlier this week. Mey Icki accounts for around three quarters of Turkey's spirits market by volume. More to the point, its distribution system is immense. In addition, although Turkey's population is overwhelmingly Muslim, the country's thirst for vodka is growing apace.
Now, I'm not going to shout from this soap box that Turkey will be the answer to Diageo's prayers in Europe. But, if things go to plan, then it sure could help.
Diageo's president for Europe, Andrew Morgan, told me on sidelines of yesterday's results conference that Mey Icki means that Diageo has effectively doubled its emerging market exposure within Europe. With Turkey set to accompany Russia, around a fifth of Diageo's sales in Europe are expected to come from what the firm still considers to be emerging economies.
Pernod Ricard has already said that it expects to lose share to Diageo in Turkey, following the Mey Icki deal. The back story to this is that, until the second half of its most recent fiscal year, Diageo had effectively been barred from Turkey by a long-running tax dispute with authorities.
This year, however, Diageo "took advantage of an amnesty" offered by the government, Morgan said. The group reported a GBP92m one-off charge in its full-year results related to a settlement with Turkey's authorities.
Including that charge, Diageo saw operating profits crumple by 23% in Europe in the year to the end of June. Its net sales fell by 5% in the region. In fiscal 2012, then, the group needs to stabilise operations.
There remain significant political risks in Turkey, particularly in relation to government alcohol policy, but Mey Icki will be a welcome addition to the table for Diageo in the next 12 months.
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