Industry

Diageo in $450m deal for cachaça maker

By Rose Jacobs and Louise Lucas in London May 28, 2012
FT
Diageo is to pay $450m for a Brazilian maker of cachaça, the sugarcane-derived liquor, as it continues its drive to source half of all sales from emerging markets by June 2015.

The all-cash acquisition of Ypióca launches the UK distiller into the premium market for the spirit used in caipirinha cocktails ahead of the World Cup in 2014 and Olympics in 2016, both in Brazil.

It follows a run of acquisitions by Diageo in emerging markets targeting local liquors, including Mey Içki, the Turkish raki maker bought for £1.3bn last year, and Chinese baijiu maker Shui Jing Fang. It is also still hoping to buy Mexican tequila maker José Cuervo .

Diageo spent £1.6bn in the last fiscal year on acquisitions in emerging markets, which now provide around 40 percent
of its sales. Ypióca is the third-biggest cachaça brand by volume and second biggest by value.

Diageo said sales of the brands it is buying - from family-owned Ypióca Agroindustrial - have risen 14 percent a year since 2007, compared with 11 percent for the cachaça market as a whole. Net sales in 2010 were R177m ($89.4m).

It said the price represented a valuation for the assets, including net debt, of around 16 times this year's expected earnings before interest, tax, depreciation and amortisation.

Analysts described the price as "not cheap" but said the deal was more about potential. Sales of mainstream cachaça are declining but Randy Millian, Diageo's president for Latin America and Caribbean, said the premium end targeted by Ypióca was a growing category that would receive a fillip from the World Cup and Olympics.

"Havaianas went from being worn on the beach to being worn at weddings," Mr Millian said, using the rise of the now ubiquitous flip-flops to illustrate how Brazilian brands can be developed.

Diageo will ramp up marketing behind the drink.

However, analysts cautioned the deal was far from the game changer that the Mey Icki deal was. "When they bought Mey Icki they were buying the industry, because it had 90 percent market share," said Trevor Stirling, analyst at Bernstein Research.

"With this they are buying the leader in premium cachaça but there are others out there and no barriers to entry."

He added that the distribution - 256,000 outlets, according to Diageo - would not all be suitable for selling the company's far pricier Johnnie Walker whiskies.