Turkish deal highlights potential of emerging markets

The £1.3 billion purchase of Mey Icki, Turkey’s dominant spirits company, is not the “transformational” deal Diageo is increasingly being predicted to make, but it is its first £1bn-plus acquisition in a decade and ticks all the group’s boxes in terms of strategy and profitability.

Mey Icki commands 80% of the market for raki – the national drink which accounts for about a quarter of all alcohol sales in the country – is also the national leader in vodka and has a virtual stranglehold on distribution in Turkey.

It had sales last year of about £325m, meaning that the cost is about 10 times earnings before interest and tax etc, which is on the cheap side when you consider that Diageo itself stands on a multiple of about 14.

True there is a political factor to take into account – while Diageo is on the verge of settling a £100m tax suit with the Turkish government, there is increasing restriction on alcohol advertising, which may make it less easy for Diageo to leverage its international premium brands, but the purchase price accounts for those hurdles.

Despite increasing drift towards an Islamic code, Turkey is a burgeoning market. Some forecasts say that the national economy will expand by 5% a year for the next year and that the spirits market will grow at double that rate.

The market for alcoholic beverages has grown by two thirds since 2005 and now most future expansion will go to Diageo. Indeed, some commentators believe that the Mey Icki purchase effectively excludes other players from the market (except in marginal terms) for the next decade.

To gauge the expansion potential of a 74m population with a rapidly expanding middle class, one only has to look at the progress of Mey Icki itself and a competitor’s comment.

The company was bought from the Turkish government in 2006 by private equity interests who have made a return of about five times their investment, a growth trend that is predicted to continue.

As a measure of how the market is expanding, Pierre Pringuet, Pernod Ricard’s chief executive, said this week that growth in Turkey was “virtually compensating” for the plunge in Greece due to its financial and political malaise. It is reckoned that the Greek market has fallen by about 35% in a year.

Indeed, the Diageo deal reflects the diverging impetus in Western European markets, which are mature and are growing only marginally, and Eastern European and Middle Eastern states.

The Balkans, Romania, Bulgaria and parts of the Gulf are increasingly important and profitable as the global drive to push consumers up the price ladder continues.

With organic operating profit growing by a pedestrian 1.8% in the six months to December, Diageo is looking for a tonic to its bottom line and Mey Icki will add about 1% to earnings per share in the first year.

Deals for Moët Hennessy and parts of Fortune brands are still possibilities as the Mey Icki purchase still leaves Diageo with a resilient balance sheet, but expect it to be looking for more Mey Ickis as the importance of emerging markets grows to the global drinks giants.

Finance on Friday, 25.02.2011