Diageo PLC has decided to swap whiskey for tequila. The British drinks giant said Monday it has entered into an agreement with Jose Cuervo, owned by the Beckmann family of Mexico, to take full control of tequila brand Don Julio. In return, Diageo will sell Irish whiskey label Bushmills to the Mexican company.
The asset-swap will result in a net payment of $408 million to Diageo, which it will use to pay down debt.
The deal is Diageo’s third push into tequila this year following agreements to buy DeLeón—in a joint venture with the rapper Sean Combs —and Peligroso.
In return for the 50% of Don Julio it doesn’t already own, Diageo will lose Bushmills, which it acquired from Pernod Ricard SA in 2005. First distilled in Ireland in 1608, Bushmills is the No. 2 Irish whiskey brand by sales in North America, after Pernod’s Jameson.
But Diageo said the potential for growth in tequila, a still-nascent category with limited sales outside the U.S. and Mexico, outweighed the established global appeal of Irish whiskey.
“We don’t see it as we’re losing anything” by selling Bushmills, said Deirdre Mahlan, Diageo’s chief financial officer.
Diageo’s decision to ditch Bushmills is part of a broader shift upscale by the world’s biggest liquor maker, which also owns Johnnie Walker Scotch whisky and Smirnoff vodka. Don Julio sells for around $70 a bottle at entry level.
While 800,000 nine-liter cases of Bushmills were sold in the year to June 30, compared with 590,000 for Don Julio, the value of those sales was £57 million for the whiskey and £105 million for the tequila.
By buying Bushmills, Jose Cuervo—whose eponymous brand is the world’s biggest-selling tequila—will look to reach drinkers beyond tequila’s traditional heartlands in the Americas. “Both sides are satisfied,” with the deal, Ms. Mahlan said. A spokesman for Jose Cuervo couldn’t immediately be reached for comment.
Last month, Diageo reported a 1.5% fall in overall fiscal first-quarter sales compared with the same period last year amid stalling growth in North America and weakness in Asia. It said then that its high-end brands, such as Johnnie Walker Blue Label and Tanqueray gin, continued to sell strongly, but sales of so-called mainstream brands remained under pressure.
Diageo and the Beckmann family for many years had a distribution agreement centered on selling Jose Cuervo tequila. But that agreement broke down last year, as did talks about a takeover of Cuervo by Diageo. Ms. Mahlan said Diageo was no longer in any discussion regarding the Cuervo brand.
As part of the deal with Cuervo, Diageo has also agreed to allow the Mexican company to terminate early its production and distribution arrangements for vodka brand Smirnoff in Mexico.