Search Here

British drinks group Diageo (DGE.L) is buying a maker of Brazil's most popular spirit, cachaca, for about 300 million pounds ($469 million), boosting its expansion in fast-growing emerging markets while it fights for a bigger prize in tequila.

The London-based maker of Johnnie Walker whisky and Smirnoff vodka, which is aiming to get half of its sales from emerging markets by 2015, said on Monday it had agreed to buy Brazil's Ypioca from its family owners.

Ypioca is the third-biggest player in the market for cachaca, a spirit made from fermented sugar cane also known as Brazilian rum, and leader in the rapidly-expanding premium segment of the market.

Cachaca accounts for about 80 percent of the volume of the Brazilian spirits industry and, when mixed with ice, sugar and lime makes the Brazilian cocktail Caipirinha.

Diageo, like other international drinks groups, is looking to build its presence in emerging markets in order to offset sluggish demand in austerity-hit Europe.

The group has long been in discussions with the owner of Jose Cuervo tequila about taking a stake in the $3 billion-plus valued No.1 tequila brand, with some sources saying progress in the talks has slowed due to problems about the ultimate control of the brand.

Diageo made no comment about its talks about Cuervo.

The group has also recently invested in businesses such as Mey Icki in Turkey and ShuiJingfang in China to push up its sales from emerging markets which currently account for nearly 40 percent of its global total.

Diageo said its cachaca acquisition is expected to be earnings neutral in the first full year of ownership and cover its cost of capital by year five, which analysts said put it in line with recent deals. The British group did not give any profit figures for the Brazilian business.

"Brazil is an attractive, fast growing market for Diageo with favorable demographics and increasing disposable incomes. The acquisition of Ypioca gives us the leading premium brand in the largest local spirits category," said Diageo Chief Executive Paul Walsh in a statement.

Diageo is buying the business from the family-owned Ypioca Agroindustrial Limitada with its 160 year heritage in the northeastern Brazilian state of Ceara. The deal gives it a cachaca distillery, bottling plant and warehouse.

"We view this style of bolt-on emerging market deal positively, offering local premium brand leadership as well as distribution synergies over the mid-term for Diageo's international spirits," said UBS analyst Melissa Earlam.

She calculated that Diageo paid a multiple of around 19 times earnings before interest, tax, depreciation and amortization (EBITDA) for the business and estimates a 25 percent EBITDA margin on its 60 million pounds of annual sales.

Diageo shares were up 0.9 percent at 1,528 pence by 4.45 a.m. EDT, broadly in line with the London stock market .FTSE.

This article is copyrighted by Reuters