More Diageo and Cuervo Talk


Dear Client:

[Editor's note: Lots of news items surfaced over the weekend, so we thought it was worth an early morning edition to start off the week].

The impending outcome of ongoing negotiations between Diageo and Cuervo is one of the biggest news stories of the year, and it sounds like they are getting closer to striking a deal. Both BusinessWeek and The Daily Telegraph reported over the weekend that Diageo has appointed Goldman Sachs and HSBC Holdings as advisors, in addition to Barclays Capital.

But what really matters is whether Diageo will succeed in purchasing Cuervo in its entirety, or settle with taking a small stake in the company. You may recall Reuters reported last week that Diageo is "edging towards a deal" to take a minority stake in Cuervo, which is valued at about $3.1 billion. That still seems to be the case. Unnamed sources told the Sunday Telegraph that "it is thought more likely" that Diageo will take a minority stake in Cuervo in return for shares in Diageo, with an option to "renegotiate the deal in a few years time to permit an eventual route to control." Why shares and not cash? Because Cuervo already has a lot of cash - at least that's the thinking.

Nomura analyst Ian Shackleton believes "'the family don't want to see out,'" noting that patriarch Juan Beckmann is "'60-something'" and not ready to leave the business. "'So will Walsh get a deal? We're a bit skeptical.'" A more likely scenario, perhaps, is that Diageo will retain the US distribution agreement and take a small stake in Cuervo, with options to discuss a higher stake "in, say, three of five years," says the newspaper.

BusinessWeek goes a step further by suggesting that the talks may lead to nothing. "It's unclear whether all of the family members are committed to a process." One of the issues being discussed is reportedly agave supply. So once again, we wait for the outcome.


Reports out of Poland are claiming that Belvedere Group is in talks to sell Sobieski Vodka to Brown-Forman. A reported "10 investment funds and nine industry investors" are competing for the brand, which could sell for as much as $868 million (650 million euro), but B-F is supposedly in the lead. Reports claim the sale would likely take place in the second half of 2012.

Sobieski has denied the rumor to WSD in the past, saying it randomly surfaces from time to time. Belvedere President Krzysztof Trylinski also claimed it is useless speculation, but did not deny that the company is indeed looking to sell-off certain assets to quickly pay down debts.

Our thoughts? True, Belvedere faces considerable debt and could use the money, but why would they want to sell one of their fastest growing brands? But if they were indeed shopping Sobieski it's not surprising that B-F would consider taking on the popular brand. Execs recently said they are open to potential acquisition to boost their vodka presence.


On Friday F. Korbel and Bros announced its intentions to sell Kenwood Vineyards as well as its related assets in Sonoma County to Banfi Vintners. This, said owner Gary Heck, will allow them to focus more on their champagne and brandy business.

"After experiencing the worst recession in 70 years, the California wine business is emerging from this difficult period in good shape and it seemed an opportune time to explore the sale of Kenwood Vineyards," said Gary. "This will allow us to focus the company's resources on its leading California champagne and brandy business."

Korbel took on Kenwood in 1999 when it was producing less than 300,000 cases. Since then it has grown to over 550,000 cases in 2011. The sale is expected to close in June. Financial details were not disclosed.

Meanwhile, the Heck Family will retain Korbel Champagne Cellars and will continue its marketing and sales agreement with Brown-Forman.

BANFI'S FIRST MOVE INTO CA. The Mariani family, the owners' of Banfi, first entered the domestic market in 2010 with the purchase of Washington State's Pacific Rim. Assuming the Kenwood deal closes, this will mark their entrance into California wine.

The Mariani family "is dedicated to the global wine business," with properties including Castello Banfi vineyard estate in Montalcino, an equity partnership in Italy's Bolla wines and a joint-venture sales and marketing firm with Concha y Toro called Excelsior Wine Company. But the next step "in building on our success as brand builders is involving ourselves with a significant California wine estate," said Banfi co-ceo James Mariani. They are also looking "to round out and complement our partnerships in Europe, South America and Australia."

Regarding the Kenwood acquisition: "We want the transition to be as seamless as possible."


Privatization opponents have one more chance in Washington. The state Supreme Court has agreed to hear arguments after a lower court judge surprisingly reversed his decision in March and sided with Costco. The trial is set for May 17, which is just a few weeks before private retailers are allowed to start selling spirits on June 1. Recall that the state has already completed the first phase of privatization by allowing private wholesalers (including Southern and Young's) to distribute spirits.

BACKGROUND. Recall Cowlitz County Judge Stephen Warning partially sided with privatization opponents in early March by ruling that Initiative 1183 seemingly violated the state's single subject clause because it addressed two different subjects: liquor and public safety.

But two weeks later he sang a different tune. Attorneys for the defendants in the case, including Costco and the state, argued on March 19 that public safety is tied to alcohol, so they both fall under the same single subject. After hearing arguments from both sides, the judge reversed his earlier decision and granted the state's motion for summary judgment.

AN IMPORTANT SIDE NOTE. We'll know soon enough if Washington is allowed to move forward with privatization, or if it will have to go back to the old system. However, it's important to note that a number of people close to the ground have told WSD that even if the Washington State Supreme Court sides with the plaintiffs and tosses I-1183, the legislature could override the decision on the grounds that 59% of voters wanted it.


STOLI NIXING TV FOR DIGITAL. Stolichnaya is replacing its celebrity-driven marketing campaign titled "Would you have a drink with you?" for a digital push highlighting its originality, reports AdAge. Under new agency Berlin Cameron, Stoli will run 30-second digital spots showing people doing "original" things with a tagline that reads: "The most original people deserve the most original vodka." It plays off the fact that Stoli was one of the first imported vodkas and one of the first to sell flavored vodka. It plans to increase advertising spend by +76% this year.

GALLO TO DISTRIBUTE ITALY'S BRANCAIA. E. & J. Gallo Winery said on Friday that it has acquired the exclusive rights to distribute Tuscany's Brancaia wines in the United States effective April 1. "This is a great addition to our Luxury portfolio of fine wines," said Roger Nabedian, svp of Gallo's Premium Wine Division. Its portfolio includes Brancaia Tre, a blend of Sangiovese, Merlot and Cabernet Sauvignon; Brancaia Chianti Classico; Brancaia Ilatraia, a blend of Cabernet Sauvignon, Sangiovese and Petite Verdot; Brancaia Il Blu, a blend of Sangiovese, Merlot and Cabernet Sauvignon. It joins Gallo's other imported wines from Argentina, Germany, Spain, Italy, Australia, South Africa, France and New Zealand.

DELAWARE PUSHING FOR CRAFT DISTILLERIES. If passed, Senate Bill 180 would allow licensing for craft distilleries in the state. Currently brewpubs are allowed to produce spirits, but they are limited in selling to consumers on the premises and to wholesalers. Dogfish Head Founder Sam Calagione testified in favor of the bill. The craft brewer already produces Blue Hen Vodka, Jin gin and three types of rum. The bill, which would allow distilleries to sell 750,000 gallons a year, will likely head to the Senate for a vote this week.

NEW YORK WINE LOBBYISTS BACKING OFF. Lobbyists who have pushed for wine-in-grocery sales in recent years are reportedly backing off this year, according to the Democrat & Chronicle. Considering that Gov Cuomo is openly against it, they figure they will have better chances in the future. Wegmans alone has spent millions on the initiative since 2009.

Until tomorrow, Megan

"Part of the secret of success in life is to eat what you like and let the food fight it out inside."
Mark Twain

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