Diageo raises its spirits with Turkish deal

LONDON (Reuters) - Diageo Plc, the world's biggest spirits maker, agreed on Monday to buy raki spirits maker Mey Icki for 1.3 billion pounds ($2.1 billion) in cash to give it access to the fast-growing Turkish market.

The London-based maker of Johnnie Walker whisky and Smirnoff vodka is buying Turkey's biggest spirits company, with an 80 percent share in the country's top-selling spirit category, the aniseed-flavored raki, and a leading seller of local vodka.

The British group hopes the business it is buying from private equity groups TPG Capital LP and Actera will help it tap into a local boom in raki and vodka, and boost sales of its own brands through Mey Icki's network. It aims to resolve Turkish tax issues that had delayed a deal in the next few weeks.

"Turkey is seeing rapid growth of its middle classes, so there is growth in local raki and vodka, while the deal provides a fantastic platform for Diageo's international brands in Turkey," the head of Diageo's Europe business, Andrew Morgan, told a conference call after agreeing the deal.

Morgan said the Turkish parliament had recently agreed an amnesty for spirits groups covering a retroactive tax on imports between 2001 and 2009, and he was optimistic the issue would be settled in a favourable way over the next few weeks.

Diageo shares were up 0.1 percent at 12.01 pounds at 1150 GMT in a falling London market, as analysts said it was a useful medium-sized deal that would give it a dominant position in a fast-growing emerging market.

"Diageo's acquisition of Turkey's Mey Icki looks both financially and strategically sound. At less than 10x historic EBITDA the valuation looks reasonable," said analyst Jamie Isenwater at brokers Deutsche Bank.

The British group is paying 9.9 times Mey Icki earnings before interest, tax, depreciation and amortization (EBITDA) in 2010, for a business with a 70 percent spirits market share in Turkey and relatively high margins.

Analysts say the median multiple for spirits acquisitions over the last decade was 13.7, but there is no clear comparable deal for emerging markets. Multiples in the last five years range from Campari's Carolans acquisition last year for 7.5 to the 20.4 times Pernod Ricard paid for Absolut vodka group Vin & Sprit in 2008.

Mey Icki had net annual sales of 300 million pounds in 2010 and earnings before interest and tax (EBIT) of 120 million pounds. The deal will be earnings accretive for Diageo in the first full year of acquisition by around 1 percent.

Diageo says cost savings will be limited as it has a relatively small current business in Turkey, largely selling Johnnie Walker and J&B whiskies. Analysts estimate cost synergies will amount to around 50 million pounds a year.

The deal is set to be completed in the second half of 2011.

"Turkey is an attractive, growing market for Diageo, with strong GDP growth. The acquisition of Mey Icki transforms our existing position in this fast-growing spirits market," said Diageo Chief Executive Paul Walsh in a statement.

Diageo was advised by UBS and HSBC in the deal.

(Reporting by David Jones; Editing by Mark Potter and Will Waterman)