Jose Cuervo Investors May Be Too Giddy Over Bacardi-Patron Deal

(Bloomberg) -- Bacardi’s purchase of Patron for $5.1 billion sent shares of the Jose Cuervo-maker, Becle SAB, to a near-record high.

The hefty price tag on the Patron deal suggested to some that the market had been substantially undervaluing Cuervo’s tequila. The Bacardi-Patron deal implies an enterprise value of $2,125 per case for Patron, while Jose Cuervo has an enterprise value of $321 per case, according to Credit Suisse.

Not so fast, said Credit Suisse’s Antonio Gonzalez. The analyst pointed out that the two tequila makers’ businesses aren’t necessarily comparable.

Most of Cuervo’s business is in the “mainstream segment,” where it charges around $17 per bottle. Patron is in the more profitable “ultra-premium” segment -- the fastest-growing group in the tequila category -- where bottles go for more than $40.

“Investors should NOT imply from these figures that Cuervo’s market valuation is too cheap,” Gonzalez wrote. Moreover, Credit Suisse doesn’t expect Cuervo to be a takeover target in the medium-term, thus “high valuation levels for recent M&A transactions should not be extrapolated to infer Cuervo’s ‘fair’ valuation,” he said.

Still, distillers may take the Bacardi-Patron deal as a sign to increase their valuation expectations when assessing takeover offers, which could boost Jose Cuervo in the long-term.

Luis Miranda, who covers Becle for Santander and has a buy rating on the shares, said the Patron news is positive because it shows big global distillers are interested in M&A.

Agave-based beverages, which include tequila and mezcal, have seen sales accelerate over the past decade. Super-premium tequila grew eightfold between 2002 and 2016, according to the Distilled Spirits Council, a trade organization.

Shares of Becle rose as much as 5.4 percent to 35.32 pesos on Tuesday, the highest since the week after the company’s February 2017 initial public offering.

To contact the reporter on this story: Michelle F. Davis in Mexico City at mdavis194@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Christiana Sciaudone, Richard Richtmyer

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