Diageo Agrees to Buy Turkish Distiller Mey Icki From TPG for $2.1 Billion

Diageo Plc plans to make its biggest purchase in more than a decade by acquiring Mey Icki in a transaction that values Turkey’s largest maker of Raki at 3.3 billion Turkish lira ($2.1 billion).

The acquisition from private-equity firms TPG Capital and Actera furthers Diageo’s aim of expanding in emerging markets that have “a rapidly growing middle class,” Chief Executive Officer Paul Walsh said today. Turkey’s gross domestic product is set to grow 4.6 percent in 2011, according to estimates compiled by Bloomberg, more than the U.S. and U.K.

“We see the Turkish market having high growth potential and Mey Icki’s market position is attractive with relatively high margins,” analysts including Jason DeRise at UBS AG in London wrote in a note today before the purchase was announced.

Mey Icki, which Diageo estimates controls 80 percent of the market for Raki, may not be the last acquisition by the world’s largest distiller, analysts said. Diageo, the owner of Smirnoff vodka, aims to make purchases in markets where growth is the fastest, Chief Financial Officer Deirdre Mahlan said in an interview this month, after the company reported first-half revenue and profit that missed analysts’ estimates.

Diageo shares rose 2 pence to 1,202 pence as of 11:28 a.m. in London. The stock has gained 1.4 percent this year, giving the company a market value of 30.1 billion pounds ($49 billion).

More Acquisitions?

The acquisition of Mey Icki will add 1 percent to Diageo’s earnings per share in the first year of ownership, the distiller said in a statement. The deal will be funded through existing cash resources and debt.

Cost savings from the purchase won’t be significant, Andrew Morgan, Diageo’s European president, said on a call today. Diageo hopes to settle an unrelated tax issue with the Turkish government in the next couple of weeks, he said.

Morgan declined to comment on whether the London-based company would consider further acquisitions.

“They’ve still got at least another 2 billion pounds” for other purchases, which may include Fortune Brands Inc.’s spirits unit, which owns Jim Beam bourbon, said Samar Chand, an analyst at Barclays Capital in London. “This doesn’t change the story of there being more acquisitions in the next 12 to 16 months.”

Diageo had 6.95 billion pounds in total current assets as of June 30, according to Bloomberg data.

Morgan declined to comment on the proportion of debt used to finance the acquisition.

Ebitda Multiples

The distiller is paying 9.9 times Mey Icki’s 2010 earnings before interest, taxes, depreciation and amortization, Morgan said. The average multiple paid in the wine and spirits industry in the past 10 years is 12.7 times Ebitda, data compiled by Bloomberg shows. The purchase is Diageo’s biggest since the 2000 acquisition of the Seagram’s liquor business from Vivendi SA.

The multiples paid by Diageo are “undemanding,” said Andy Ford, an analyst at MF Global, who recommends investors “buy” the shares. “Turkey’s economy is growing rapidly and its population is young and urban, both of which are positive for likely future spirits market growth.”

Under Turkish Prime Minister Recep Tayyip Erdogan, gross domestic product per head rose to $8,600 in 2009 from $3,500 in 2002, according to figures from the Treasury. The government’s medium-term plans see GDP per person reaching $10,600 this year. The number of households that earn more than $15,000 a year is set to grow to more than 60 percent of the population in the next few years, Morgan said in an interview with Bloomberg.

Distribution Network

Mey Icki has a distribution network that reaches 57,000 outlets and employs more than 650 sales people, Diageo said. The distribution chain will help Diageo sell international spirits brands in the country as well as Mey Icki’s existing liquors, it said. Sales of beverages including Diageo’s J&B and Johnnie Walker whiskies are growing in the country, according to Morgan.

Diageo has the skills to persuade Turkish consumers to buy more expensive brands of Raki, an aniseed-flavored spirit, as well as international spirit brands, Barclays Capital’s Chand said. Mey Icki’s mainstream brand “Yeni Raki” represents 64 percent of its Raki sales compared with the more expensive “Tekirdag” brand, which represents about 9 percent of the market, according to Diageo.

Mey Icki is also Turkey’s market leader for vodka, the fastest-growing alcohol category in the country, Diageo said. The acquisition may allow Diageo to increase sales of Smirnoff in the country. Vodka is gaining popularity among younger drinkers and women, and in bars and restaurants, Diageo said.

Investment Return

UBS AG and HSBC Holdings Plc acted as financial advisers to Diageo, the company said. The purchase will be completed in the second half, it said. TPG and Actera were advised by JPMorgan Chase & Co. and Goldman Sachs Group Inc.

TPG returned about 5 times its investment selling Mey Icki to Diageo, a person familiar with the transaction said.

The buyout firm said today that its “local knowledge” of the Turkish market and “unique experience in improving and growing businesses will present other opportunities to invest in this attractive market.”

TPG this month said it would offer 25 percent of Mey Icki in an initial public offering. TPG, the Fort Worth, Texas-based firm run by David Bonderman, bought 90 percent of Mey Icki in 2006 for $810 million. The seller was a local joint venture led by an association of beverage sales agents, which paid Turkey’s government $292 million for the company in 2003. Actera Group, an Istanbul-based private-equity firm, holds the remainder.

To contact the reporter on this story: Clementine Fletcher in London cfletcher5@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Kevin Miller at kmiller@bloomberg.net

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