By Anshia Dutta

Bacardi Limited has agreed to buy Patrón Spirits International AG, the high-end tequila maker in a $5.1 billion deal, with the hope of becoming the second largest spirits company in the US.

About Bacardi Limited

Founded on 4th February 1862 in Cuba, Bacardi Limited is the largest privately held spirits company in the world today. It is headquartered in Hamilton, Bermuda. The company was originally known for its Bacardi white rum, but today it has a portfolio of more than 200 brands and labels. Over the years, Bacardi has made a number of acquisitions in order to grow and expand its business.

It merged with Martini and Rossi in 1993, thereby creating the Bacardi-Martini group. Then, in 1998, it acquired Dewar’s scotch, including Royal Brackla and Bombay Sapphire Gin. Later, it purchased Cazadores—a tequila brand in 2002 and in 2004, acquired Grey Goose, the French-made vodka from Sidney Frank. It further bought 42 Below, a New Zealand vodka brand in 2006. In addition to this, the US version of Havana Club, Drambuie Scotch whisky liqueur, DiSaronno Amaretto, Eristoff vodka, B&B, and Bénédictine liqueurs are other brands associated with Bacardi Limited. The latest to add to the list is the acquisition of Patrón Spirits International.

The acquisition of Patrón Spirits International AG

On 23rd January 2018, the ultra-premium tequila brand Patrón announced that Bacardi Limited is acquiring it for a whopping $5.1 million. The deal was announced days after Pernod Ricard bought Avion Tequila and some months ago, Diageo had acquired George Clooney’s Casamigos tequila. Bacardi had already purchased 30% of Patrón in 2008. The transaction is expected to be completed by the beginning of July 2018. As a part of the deal, Patrón’s co-founder, John Paul DeJoria will sell 70% of his stake in the firm. After the acquisition, DeJoria is going to remain with the company as the Chairman Emeritus, thus being the ambassador of Patrón. Reflecting on his legacy in the business, DeJoria said, “Today we produce more than three million cases of distilled spirits annually that are enjoyed around the world. I am proud of what our entire organization has accomplished.”

Analysis of the deal

This deal will not only make Bacardi the largest spirits player in the super-premium sector of the US but will also make it the second largest company in the US, according to market share by value. This acquisition marks the first major deal of Mahesh Madhavan, who was appointed as CEO of Bacardi Ltd. in October 2017 by the family that controls the company. He decided to go ahead with the purchase since tequila has been a faster-growing category than the overall alcoholic drinks market over the past years as high-end brands help tequila shrug off its image as a party drink. Consequently, consumers’ tastes and preferences are shifting from beer and vodka to tequila. According to Distilled Spirits Control, tequila volumes have grown by 6% every year since 2002. Madhavan said, “Adding Patron to the Bacardi portfolio creates a tremendous opportunity for the brand outside of the United States as Bacardi’s international distribution network will help grow Patron around the world, increasing scale in the U.S. and globally.”

Edward Mundy also said, “We detect greater direction at Bacardi following the change of CEO in October, and the acquisition of Patron sends a strong message on priorities: focus on the U.S., focus on higher-growth premium brands, and focus on growing Patron distribution globally.”

Is the acquisition price too much or too less?

According to Jefferies analyst Edward Mundy, the purchasing price is about 25.5 times Patrón’s estimated operating earnings and 7.5 times its sales. Since Bacardi already held a stake of 30%, it means that the $5.1 million is for the remaining 70%, thus making it overvalued. However, not everybody feels the same.

Philip Duff, a liquor consultant and educator who runs Liquid Solutions bar consulting seems to think that the acquisition price was undervalued. Duff said, “In the luxury spirits market in the U.S., Patrón is a very big deal indeed, standing shoulder-to-shoulder with the likes of Macallan, while selling at similar prices, and outselling Macallan on a volume basis.” Since Patrón dominates tequila and has a huge amount of growth potential internationally, he believes that the brand could have sold itself for more than $5.1 million. Calling the deal as a clever one, he added, “Bacardi had 30 percent of this already, so they’d make a clever side-bet years ago, and they also distributed Patrón frequently in international markets, so it’s like getting the nose of the camel underneath the tent. It’s a great way to build trust as the two companies get to know one another and to prevent a bidding war. But if you had asked me before if it would go for seven times or 16 times [its annual revenue], I would have said 16 times, maybe 20 times. Tequila is especially hot at the moment.”

Featured Image Source: Visual Hunt

Stay updated with all the insights.

Navigate news, 1 email day.

Subscribe to Qrius