Diageo plc (LON:DGE) suffered from a tequila hangover today as brokers reacted to news the blue chip drinks giant has splashed out US$1bn to buy Casamigos, a super-premium tequila brand part owned by Hollywood star George Clooney.
The FTSE 100-listed owner of alcohol brands such as Jonny Walker, Smirnoff and Guinness revealed after Wednesday's market close that it will pay an initial US$700mln for Casamigos, plus a further US$300mln subject to the brand’s sales performance over the next ten years.
READ: Diageo goes Hollywood with US$1bn deal for George Clooney’s Casamigos tequila
Clooney was one of three headline founders of Casamigos, alongside Cindy Crawford's husband and entrepreneur Rande Gerber and Mike Meldman.
In mid-morning trading today, Diageo shares were 1%, or 25.5p lower at 2,349p.
In a note to clients on the deal, analysts at US investment bank Citi said the brand acquisition “should help Diageo’s medium term growth in US, but this comes at a very high price.”
They pointed out that Casamigos, launched in 2013, has been one of the fastest growing brands in the alcohol space, shipping 120,000 cases in 2016 - at a retail price point of US$45-55 - and the company expects to sell170,000 cases in 2017.
Multiple Diageo is paying ”looks very high”, says Citi
The analysts said that on Diageo’s platform, they think the brand has “plenty of room to grow in the US, and to a lesser extent in Europe and Travel Retail.”
But they added: “The multiple Diageo is paying looks very high, however – c20x 2016 sales (of c$37m on our estimates), excluding the earn-out.”
Diageo said yesterday that it expects the Casamigos acquisition to be "economic positive in the fourth full fiscal year post completion".
“Good brands in strategic growth categories are going to command high valuations”
In another note to clients, analysts at UK broker Shore Capital said: “Based on this guidance we believe it is hard to argue the acquisition is a ‘steal’ but on the face of it Diageo is adding a high growth brand in a market category that is currently buoyant especially at the premium end.”
They added: “The valuation of this deal may disappoint those investors who were expecting Diageo to announce capital returns guidance as leverage was coming down albeit we believe this was at least another year away without deals and assuming trading remained solid overall.”
The analysts concluded: “Our view, is that good brands in strategic growth categories are going to command high valuations. We believe this deal highlights Diageo to be focused on strengthening its position in a growth category in its most important market.”
Shore Capital repeated a ‘buy’ rating on Diageo shares; Citi has a ‘neutral’ stance with a 2,500p price target.