Diageo , the world's biggest spirits maker, is in talks with the owners of Jose Cuervo tequila over extending a distribution deal or buying it outright for over $2-billion (U.S.), sources familiar with the matter told Reuters.
The London-based group distributes the world's best selling tequila in most big export markets outside Mexico and is currently talking with the Beckmann family owners about what happens when this long-term contract ends in June 2013.
Chairman of Casa Cuervo and heir to a tequila empire founded in the late 1800s Juan Beckmann Vidal told Reuters earlier this month that his company was renegotiating a distribution deal. "We don't need to sell," he said.
"Diageo are talking to Jose Cuervo about the future shape of the relationship which has a number of potential scenarios," one of the sources said on Wednesday.
Banking sources said an agreement on either an extension to the distribution deal or an full scale acquisition is likely.
"I would be amazed if the two don't come to an agreement. Conversations are ongoing," said a banker familiar with the sector, adding that a deal was possible before the end of the year but was not on the immediate horizon.
Diageo is seen as the clear favourite to buy Cuervo due to its current relationship and its financial firepower ahead of rivals Pernod Ricard and privately-owned Bacardi if the Beckmann family decides to sell the brand.
Analysts at brokers JP Morgan Cazenove value the Jose Cuervo family of brands at around $3.4-billion when applying a 15 times earnings before interest, tax, depreciation and amortization ratio based on similar transactions historically.
They estimate Diageo sells around 3.6 million 12-bottle cases of Jose Cuervo annually in the United States and a further 900,000 cases in other markets compared to a total global volume of the Jose Cuervo family of tequila brands put at 5.6 million cases in 2009 according to drinks industry newsletter IWSR.
Sources close to Diageo said that no news was imminent and that talks about the future of the brand were on-going. Diageo is clearly interested in buying at the right price but the decision depends on if the Beckmanns want to sell, they said. A Diageo spokesman declined to comment.
Analysts believe the Beckmanns may be assessing a sale ahead of a possible break up of Fortune Brands , which will put Sauza, the world's second-biggest tequila, on the market. They note that Cuervo is 2.5 times larger than Sauza in the key United States market with bigger distribution outside the U.S.
Fortune agreed to sell its Titleist golf equipment business this month and looks to split off its home products division to focus on its drinks business. But this is seen as making the rump group of Jim Beam bourbon and Courvoisier cognac more vulnerable to a takeover bid.
A second London banker said: "It makes a lot of sense. A deal between Diageo and Cuervo is the most logical outcome. Diageo doesn't have a tequila brand and with Fortune selling, it may confront a new competitor."
In a separate move, Diageo decided to split up its international region into Africa and Latin America as part of a policy to focus more resources on fast growing emerging markets and away from some mature markets.