Diageo Downs Ketel One But No Absolut Chaser

Posted by: Charles DuBow on February 06

Diageo (DEO) is in Dutch—but in a good way. After months of flirting with buying Absolut vodka from the Swedish government, the world’s largest wine & spirits company announced this morning that it would instead be forming a joint venture with the no. 4 vodka producer, Schiedam, Holland-based Ketel One, at a cost of around $900 million. The price tag for Absolut, which is the world’s no. 3 premium spirit producer, was estimated to be around $5.7 billion.

As I blogged about several weeks ago, Diageo reported sober earnings for 2008. While Absolut would have made a strong addition to Diageo's brand portfolio, the opportunity to acquire a 50:50 stake in a highly-respected vodka for considerably less than Absolut's asking price, as well as to grow Ketel One, makes it a very appealing buy.

Absolut produced a record 10.7 million cases in 2007, whereas Ketel One only did 1.9 million. But Diageo has an unequaled distribution system across more than 180 markets and could boost Ketel One's global presence significantly. In addition to such brands as Johnnie Walker, Guinness, Tanqueray and Cuervo, it also owns two vodka brands, Smirnoff and Ciroc. Smirnoff alone produced more than 25 million cases last year.

The question remains now who will pick up Absolut. Fortune Brands (FO), Pernod Ricard and Bacardi have all expressed their interest. Diageo may feel a pang of regret when one of its rivals snaps up Absolut but it can console itself in the fact that Absolut is a relatively mature brand with deep market penetration. Ketel One, with Diageo's muscle behind it, has nowhere to go but up.