We should never underestimate the financial power of celebrity. Latest case in point: Diageo's (NYSE:DEO) deal to acquire Casamigos Spirits, a maker of high-end tequila co-founded by actor George Clooney. Diageo is on the hook for up to $1 billion for the brand, making it one heck of a pricey bottle. Here are the particulars of the deal, and why Diageo thinks Casamigos is so valuable.
A drink with George
Diageo will pay $700 million up front for Casamigos Spirits, with up to an additional $300 million in performance-linked earn-outs over the next 10 years.
The brand was founded in 2013 by Clooney and a pair of his friends. It offers three tequilas -- blanco, resposado, and anejo. If ordered on Casamigos' web site, these will set a drinker back $95, $105, and $115, respectively, per 1.75 liter bottle.
IMAGE SOURCE: CASAMIGOS SPIRITS
According to Diageo, in 2016 Casamigos sold roughly 120,000 cases of tequila last year, giving the brand a 54% compound annual growth rate over two years. The liquor powerhouse continues to expect strong double-digit growth; it says the brand should sell around 170,000 cases this year.
That growth is encouraging, but Casamigos' direct association with a celebrity might have been more of a pull. Diageo made sure to point out that the tequila purveyor's founders will, as the company says, "continue to promote the brand and provide their leadership and vision."
"We are delighted that the founders will have continued involvement and active participation in the future success of Casamigos," it added. "This, combined with the strengths of Diageo, will ensure the continued momentum of the brand in the US as well as realising the growth opportunity from international expansion."
It didn't specifically mention Clooney in that blurb, nor did it say whether the still-bankable actor will participate in the brand's marketing activities going forward. Whether he does or not, though, he will still be linked to and strongly associated with Casamigos.
This Fool's take
It isn't very often that a company has a chance to buy a brand with a virtually locked-in celebrity presence. So we can understand the attraction of this facet of Casamigos' business. We're in the Age of Celebrity after all, and fame at the Clooney level certainly adds some value.
We've also witnessed a few big-ticket shopping excursions from liquor purveyors. Witness the acquisitive Constellation Brands' (NYSE:STZ) apparently rebuffed buyout offer to Jack Daniel's maker Brown-Forman earlier this year; Constellation was willing and clearly able to acquire a company that had a market capitalization in the neighborhood of $20 billion.
Although the Casamigos deal is relatively modest next to Constellation's attempt, I'm not convinced it's worth it. Yes, Casamigos is growing at an admirable rate, but we have to remember that this is from a low baseline -- after all, the company is not even five years old. Plus, as a high-end specialty brand, its appeal (and hence its upside) is limited. Connoisseurs form only a small part of the overall tequila market.
We can make a crude, back-of-the-napkin projection here. Diageo's projected 170,000 cases times the $240 or so retail price of Casamigos' reposado tequila yields under $41 million. The real take will be less, of course, factoring in the wholesale discount and other sales expenses. Diageo's ultimate profit (or loss) naturally depends on the costs of making and bottling the stuff, which probably aren't cheap given its premium status.
This means that, even at healthy growth rates, it's going to take at best quite a long time for Diageo to recoup its spend on Casamigos. I'm not sure the company's shareholders should be thrilled about this buy, no matter how much star power it brings.