Surge of M&A activity in global liquor industry shows no sign of ending

Mergers and acquisitions in liquor market after Casamigos takeover

Diageo’s recent announcement of a record $1bn deal to takeover Casamigos, the fastest growing super-premium tequila brand in the US (and co-founded by George Clooney), is just the latest indicator of intensified M&A activity in the liquor segment.

Admittedly, the surprise transaction valued Casamigos initially at $700m with a further potential $300m based on a performance linked earn-out over 10 years, but it still serves as an illustration of the stiff prices that buyers are prepared to pay nowadays. For example, just three years ago, Constellation Brands (STZ) purchased tequila brand Casa Noble for a reported $30m.

Just last month, a CNBC report indicated that alcoholic beverage maker Constellation Brands also approached Brown-Forman Corporation - one of the largest American-owned companies in the spirits and wine business, with a takeover offer - although this offer did not immediately fall on fertile ground.

Pablo Zuanic, senior equity analyst at Susquehanna International Group (SIG), explained in a recent industry update: “STZ recently tried to buy Brown Forman (was rebuffed), Campari bought Grand Marnier late last year, and now Diageo bought Casamigos (super premium tequila). M&A could be heating up in the segment."

Super premium tequila – where the action is right now

The recent intensified activity in upmarket tequila is no mere accident. Analysts have indicated that growth in the US tequila market has been focused almost exclusively in the super premium segment – with Patron leading in terms of growth, although it has slowed down somewhat in recent times.

Global sales of tequila are very buoyant and have reached 292m litres in 2016 and are projected to rise to 335m litres by 2021. Tequila is very heavily dependent on the North American market for sales and for growth – the US accounts for almost half of global volumes and the growth rate of sales is 8.4% in the US (compared to 6% globally), according to Euromonitor International. Mexico and Germany trail in second and third place in terms of sales volumes.

Significantly, much of that tequila market growth in the US is located on the premium end of the spectrum where demand for premium and super-premium brands has grown at a much faster pace.

Nevertheless, the high price paid by Diageo for Casamigos (established in 2013) was unexpected by many analysts, even though Casamigos is the poster child for the super-premium segment with its impressive growth, numerous awards and critical celebrity tie-up to one of the three Casamigos founders - George Clooney.

“The company [Diageo] obviously feels that the growth trajectory of the brand, especially with its added distribution heft will produce results. However, considering they already have a raft of high-end tequilas - such as Don Julio, Peligrosso and De Leon - it does seem rather surprising,” said Jeremy Cunnington, Senior Alcoholic Drinks Analyst at Euromonitor International.

The market has been shifting its focus to the higher tier of spirits for some time and there are only a limited number of players who are playing in this market successfully and ready to consider a change of hands.

“It is worth noting that this acquisition is part of a general trend of companies willing to pay very high multiples for spirits brands of perceived quality, eg. Pernod Ricard and Smooth Ambler and Constellation’s recent spirits acquisitions," said Cunnington.

A seller´s market

Despite the opportunities and activity across the market, Cunnington does add a word of warning. 

"It is very much a seller’s market and a number of buyers could be burnt with their optimism for the brands’ performance not matching reality.”

New takeovers breaking price records

The Casamigos transaction is also notable for the fact that it has broken records measured in terms of $ per case. “Some in the industry say normal run rate volume for the brand is 90,000, while last week at the time of the transaction it was claimed that volumes are 120,000. So, the deal ranged between $8,300-$11,110 in terms of $ per case,” said Zuanic in his analysis.

This price for Casamigos compares to $648 per case paid by Brown Forman for El Jimador in 2005, $3,300 per case STZ paid for Casa Noble and the $5,700 per case paid when Avion Spirits sold part of its ultra-premium Avion tequila business to Pernod Ricard in 2014.

Diageo has been clear that its strategy is now focused on the high-growth super-premium and above segments of the category, meaning that price is not an issue when playing in this category on the global scene.

“Tequila is one the few spirits categories growing at or above a mid-single digits pace (with faster revenue growth due to premiumization), so we would not be surprised to see more M&A activity in that segment,” concluded Zuanic.

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