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Diageo Buys Davos Brands to Step Up its Premium Gin Game

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Diageo plc (DEO - Free Report) is acquiring Aviation Gin LLC and Davos Brands LLC, popularly known as Davos Brands, in a deal worth $610 million. Post the acquisition, the company will pay $335 million and the remaining will be paid depending on the performance of Aviation American Gin over the next ten years. Also, Ryan Reynolds, a co-owner of the brand, will retain his ownership. According to sources, this transaction is anticipated to be completed by the end of 2020, subject to customary closing conditions. 

This move is in sync with the company’s plans to expand its super-premium gin segment across the United States with the addition of Astral Tequila, Sombra Mezcal and TYKU Sake to its already strong portfolio. Notably, Aviation American Gin has been one of the fastest-growing brands in the said category, with 40% segment growth in the United States.

Earlier in 2018, Diaego had bought a minority stake in Aviation American Gin. This marks the company’s second buyout of a brand linked to Hollywood celebrities. Prior to this, management had acquired the maker of Smirnoff vodka and Johnnie Walker Scotch whiskey in 2017, which was co-founded by George Clooney.

This step comes amid the ongoing coronavirus pandemic, which has led to bar and restaurant closures and drab demand for spirits. Although the easing of lockdown in various states has led to a gradual recovery in on-trade volumes and restrictions on travel retail continue, which is likely to mar results in the near term.

Nonetheless, the company expects organic net revenues to witness sequential gains in the first and second quarters of fiscal 2021 as the on-trade channel reopens and consumer demand begins to recover. However, it continues to anticipate significant COVID-19-related impacts and margin dilution against the robust performance in the first half of fiscal 2020. Driven by the significant uncertainty over the pace and the shape of the recovery dueto the pandemic, the company did not provide specific guidance for fiscal 2021.

All said, we hope that this buyout will expand the base and bolster sales in the near future, which will in turn provide some cushion to this Zacks Rank #5 (Strong Sell) stock that has declined 1.6% in the past three months against the industry’s growth of 11.8%.

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