Diageo agrees tequila-whisky swap deal with Casa Cuervo - UPDATE

Diageo has agreed on an asset-swap deal with Casa Cuervo, which will see the UK spirits group take full control of tequila label Don Julio in exchange for selling its Bushmills whisky brand.

The agreement will help Diageo expand its footprint in the high-end tequila market after efforts to take over Jose Cuervo almost two years ago didn't work out.

The deal, which also involves the early termination of Case Cuervo's production and distribution agreement for Smirnoff in Mexico, will result in a net payment of $408m to Diageo on completion.

Chief executive Ivan Menezes said the transaction "delivers two key objectives" for Diageo: "We have secured our position in the growing super and ultra-premium segments of the tequila category and further strengthened our global footprint by expanding our leading position in Mexico where the growth of spirits has great potential."

The transaction should be economic profit break-even in the third year, Diageo estimated. Assuming the deal completes in early 2015, it will dilute the group's earnings per share by 0.6% in the year ending June 2015.

Analyst Phil Carroll from Shore Capital said that the full ownership of Don Julio is "good news" for Diageo as it's a "strong brand in a high-growth category".

He highlighted that Diageo's tequila sales in the year to June 2014 were up around 34%, driven mainly by the Don Julio brand.

"At the same time we are slightly disappointed to see the sale of Bushmills which grew sales by 7% in the last financial year. Given the explosive growth in fellow Irish whiskey brand, Jameson [owned by Pernod Ricard], we always felt it had more potential that was not being exploited," Carroll said.

The market gave a cool reaction to the news on Monday, with the shares down 0.8% at 1,823.5p by 13:32.