Diageo Strengthens Tequila Category With Casamigos Buyout

Diageo (LON:DGE) plc (NYSE:DEO) is set to acquire the U.S. fastest-growing premium tequila brand, Casamigos, in a deal worth $1 billion. The company will initially pay $700 million and $300 million later after looking into the performance of the brand over the next decade. The transaction, which is expected to close in the second half of 2017, will be financed with a mixture of cash and debt.

Diageo, the owner of Johnnie Walker and Smirnoff brands, expects this acquisition to be earnings neutral for the first three years and accretive from fourth year onward. We note that Casamigos was created in 2013 by George Clooney, Rande Gerber and Mike Meldman. In fact, the brand has already delivered significant growth with shipments upto 120,000 cases in 2016, mainly in the U.S., and is currently on the path to reach more than 170,000 cases by the end of this year.

Post-acquisition, the co-founders of the Casamigos brand will continue to promote the brand and explore higher opportunities along with Diageo for further success of the high-end brand. To this end, we believe that the addition of Casamigos to Diageo’s portfolio will capitalize on its presence in the high-growth international markets. Additionally, it will strengthen the company’s market share in the fastest growing tequila category along with the existing Don Julio tequila brand, bought in Feb 2015.

It is to be noted that Diageo explores opportunities to expand geographically via acquisitions and partnerships. This liquor giant is also striding its footprint in the emerging markets of Africa, Latin America and Asia. In fact, management is putting greater thrust on high-margin products and has classified a group of brands as strategic brands that are expected to yield higher margins.

Notably, these aforesaid strategies have helped Diageo to outperform both the Zacks categorized Beverages – Alcoholic industry and the broader sector in the last one year. This Zacks Rank #3 (Hold) stock was up 11% against the industry’s decline of 1.5%. In fact, the industry is currently placed at top 25% of the Zacks Classified industries (65 out of 256). Meanwhile, the Zacks categorized Consumer Staples sector gained 3.2% over the said time period.

Stocks that Warrant a Look

Better-ranked stocks in the broader Consumer Staples sector include Craft Brew Alliance, Inc. (NASDAQ:BREW) , Constellation Brands, Inc. (NYSE:STZ) and Ollie's Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) .

Craft Brew Alliance has surged nearly 61% and currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Constellation Brands carries a Zacks Rank #2 (Buy) and has a long-term earnings growth rate of 17.8%. Also, it has posted an average earnings beat of 7.7% in the last four quarters.

Ollie's Bargain Outlet, a Zacks Rank #2 stock has a long-term earnings growth rate of 19%. Also, it has posted an average earnings beat of 14.6% in the last four quarters.

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