May 25 (Bloomberg) -- Diageo Plc, the maker of Johnnie Walker scotch and Smirnoff vodka, is in talks to buy Jose Cuervo, the world’s biggest tequila brand, for more than $2 billion from its family owners, according to three people with knowledge of the matter.
Cuervo is in exclusive discussions with Diageo, which has the first option to buy the company because of its international distribution rights to the brand, said one of the people, who declined to be identified because the talks are confidential. The negotiations may not lead to a deal because the Beckmann family hasn’t committed to selling, the people said. The Beckmanns are leaning toward a sale, one person said.
Other liquor companies including Pernod-Ricard SA are interested in the business as well, the people said. Diageo hasn’t yet formally retained bankers to advise on a transaction, while Cuervo is using Barclays Capital to explore options and negotiate a potential sale, the people said.
“This would be a good deal for the company as it would give it materially more exposure to a category on a clear upward trend,” Andy Smith, an analyst at MF Global in London, wrote in a research note. Smith said he’s confident that Diageo wouldn’t have to issue equity to fund an acquisition of Cuervo.
Diageo spokesman Stephen Doherty declined to comment. The company has expressed interest in buying the asset in the past. A spokeswoman for Barclays Capital declined to comment. E-mails and phone messages left with the secretary for Jose Cuervo Chief Executive Officer Angel Abarrategui weren’t returned.
Diageo fell 3 pence, or 0.2 percent, to 1,261 pence at 11:17 a.m. in London trading. The stock has gained 6.4 percent this year, giving the company a market value of 32 billion pounds ($52 billion).
Diageo, the world’s largest liquor maker, has been expanding in emerging markets and plans to make purchases in places where growth is faster, its chief financial officer said earlier this year. The London-based company agreed to buy Turkey’s Mey Icki in February to add the country’s largest maker of Raki liquor for about $2.1 billion.
The Beckmanns and Diageo are exploring a deal ahead of Jim Beam maker Fortune Brands Inc.’s plan to split and focus on its distilled-spirits business, the people said. That has led to takeover speculation for Beam, which makes Sauza, the world’s No. 2 tequila brand.
Buyers have paid an average of 13.3 times earnings before interest, taxes, depreciation and amortization for spirit and winemakers in the past decade, according to data compiled by Bloomberg. Cuervo might have Ebitda of $125 million, analysts at Nomura estimated in a May 4 note. A price of $2 billion would imply a multiple of 16 times Ebitda, the Nomura analysts said.
Juan Beckmann Vidal, chairman of Casa Cuervo, said in an interview with Reuters this month that the company was renegotiating its distribution deal with Diageo and wasn’t considering selling the brand.
Jose Antonio de Cuervo obtained land from the King of Spain in 1758, and the first Vino Mezcal de Tequila de Jose Cuervo was made in 1795, according to the brand’s website. All Jose Cuervo is made in Tequila, in the Mexican state of Jalisco. Tequila is made from the blue agave plant and has to be produced in a designated area to be labeled Tequila, the website says.
The Sunday Times in March reported that Diageo was considering an offer for Jose Cuervo.