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Diageo Targets Brazil With $453 Million Ypioca Acquisition

Diageo Plc, the maker of Smirnoff vodka and Johnnie Walker Scotch whisky, said it will pay 900 million reais ($453 million) in cash for Brazilian cachaca brand Ypioca as it expands in faster-growing emerging markets.

Diageo, the world’s biggest distiller, will buy the brand and some production assets from Ypioca Agroindustrial Limitada, the London-based company said today in a statement.

The acquisition will further Diageo’s push into markets outside its main regions of Europe and U.S., where weak economic conditions are restricting growth. The distiller plans to expand sales from emerging markets to at least 50 percent of total revenue. It bought Turkey’s Mey Icki raki brand for about $2.1 billion last year and got regulatory approval in March to buy a Chinese white-spirits maker, ShuiJingFang.

“This looks like a pretty smart acquisition,” Melissa Earlam, an analyst at UBS AG in London, said today. “It fits into that mould of emerging-market bolt-on deals like Mey Icki and ShuiJingFang that Diageo seems to be doing.”

As the main ingredient in a caipirinha cocktail, cachaca is the most popular liquor in Brazil, Diageo said. Ypioca, the second-largest cachaca brand by value and third-largest by volume, had annual sales of about 177 million reais in 2011. It’s made from fermented sugar cane juice and is mixed with lime, sugar and ice to make a caipirinha.

Distribution Platform

“Brazil is an attractive, fast-growing market for Diageo with favorable demographics and increasing disposable incomes,” Diageo Chief Executive Officer Paul Walsh said in the statement. The purchase will boost Diageo’s revenue growth, he said.

Diageo said it will benefit from Ypioca’s distribution strength in the north-east of Brazil, as the U.K. distiller is traditionally stronger in the south of the country. The acquisition will double the U.K. company’s size in Brazil and “gives us a platform to further penetrate the middle class by reaching a larger and wider outlet universe with a combined broader brand portfolio,” according to the statement.

Ypioca is the leading premium cachaca in Brazil, it said, with 8 percent of the market. Diageo trying to sell more expensive, higher-profit brands as fast-growing economies increase consumer purchasing power in emerging markets.

Brazilian cachaca, though, “is not a premium industry,” Trevor Stirling, an analyst at Sanford C. Bernstein, said in a note. Flavored and premium cachaca brands only account for a combined 2 percent of the market, and Brazilians tend to trade up from mainstream cachaca to beer instead of more expensive cachaca, he said.

Limited Potential

“There is potential for growth in premium cachaca,” but the opportunity is relatively small, Stirling wrote.

Diageo rose 0.6 percent to 1,523 pence as of 11:34 a.m. in London, extending the stock’s gain this year to 8.3 percent.

The acquisition represents a multiple of about 19 times earnings before interest, taxation, depreciation and amortization, UBS’s Earlam estimated. Diageo paid 9.9 times Mey Icki’s 2010 Ebitda, it said at the time of that deal.

“There seems to be an increased opportunism around M&A, but if you look at any sort of acquisition, the multiples are going to become increasingly eye-watering” as competition for assets increases, Earlam said.

Morgan Stanley advised Diageo on the transaction, which the company said will be completed in about a month.

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