Broker snap: Nomura trims Diageo target after Cuervo deal dropped

12th Dec 2012 09:51

Nomura has cut its target price for drinks group Diageo following the cancelled talks with tequila maker Jose Cuervo, but has retained its 'buy' recommendation, saying that the deal was dropped for the right reasons.The company, which owns brands such as Johnnie Walker, Smirnoff and Guinness, revealed yesterday that it has called off discussions after being unable to "agree a transaction." The two group will now terminate the current distribution agreement at the end of June 2013.Nomura said that although market expectations for the Cuervo deal were high, Diageo has shown "capital discipline in not over-paying or agreeing to uncommercial demands" from owners, the Beckmann family.Moving forward, the broker said that there are many value-added ways to do spirits M&A which can promise more assured growth, as the recent deal with United Spirits showed."In our view the company is well on its way to the target revenue exposure to emerging markets of 50% by 2015," Nomura said."For its plan B we believe Diageo will now focus on its super-premium tequila Don Julio and look to innovate to fill any gap in mainstream tequila; we do not see the company acquiring Beam to get the No2 mainstream tequila brand Sauza. We estimate that one year's innovation in the US can offset the lost profit from Cuervo distribution (£60m)."Nomura has reduced its target price for Diageo from 2,100p to 2,070p to reflect the lost Cuervo distribution agreement.Shares were down 0.26% at 1,850.62p in morning trade.BC