In June George Clooney and two other co-founders of the iconic Casamigos tequila brand celebrated selling their venture for $1bn to Diageo, a company which features as a core holding in our clients’ overseas portfolios.
Clooney is discovering that iconic brands like Nescafe and Casamigos can be very pleasing to his financial well being. Both Nestle and Diageo want to make sure that Clooney stays on board as the face of these brands in order to either maintain (in the case of Nespresso) or dramatically win market share from more established brands (in the case of Casamigos).  Most of us would be quite jealous of someone getting paid lucrative retainer fees for sipping coffee and tequila but life is not very fair most of the time.

The US drinks industry is increasingly debunking the rule of thumb that it takes ten years to build a brand, with Diageo buying, rather than building, further scale in tequila. As the 9th largest producer in the world Diageo is under-indexed in Tequila with the category representing just 1% of total revenue (at the end 2017). The transaction does make sense in addressing an under exposed category (Diageo already owns the Don Julio brand), with the potential to expand the brand internationally through their existing distribution channels. That said this may be difficult to execute given the fact that even at very ambitious forecasts for growth in Casamigos’s sales the expected return on invested capital might only approach 7% by the end of 2019 based on cash out lay today.
Taking into account that Diageo’s business generates 14% return on capital, the deal with Clooney appears expensive to the extent that overall returns on capital will be depressed by this acquisition. However, the deal strengthens Diageo’s position as the world’s leading spirits producer and adds another premium brand to its portfolio whilst providing higher growth in a key but challenging market for the company.
Diageo trades on 20 times expected earnings for next year whilst offering a dividend yield of close to 3% based on forecasted dividends. Diageo trades at a 5% valuation discount to its global staples peer group despite organic sales growth finally recovering.  Our recent decision to sell Nestle and increase our position in Diageo is a vote in favour of management to continue Diageo’s slow but steady recovery to a more sustainable 3-5% long-term organic growth rate.