Liquor giant Diageo has agreed to pay up to $1 billion to acquire the fast-growing tequila brand Casamigos, which was created in 2013 by Academy Award-winning actor George Clooney and two other business partners.
On Wednesday, the Smirnoff and Don Julio producer announced it would initially pay $700 million for Casamigos with $300 million in extra compensation based on the performance of the brand over the next decade.
"Together, we are excited about taking Casamigos to a bigger audience globally," Deirdre Mahlan, president of Diageo North America, told Wall Street during a presentation after the deal was announced. Mahlan said the deal played strongly into Diageo's broader strategy to sell more premium-priced spirits. In the immediate term, Casamigos hopes the acquisition will expand its presence in the U.S. market, with a longer-term goal of bringing the brand to more markets abroad.
Casamigos was created by Clooney, Rande Gerber (the husband of model Cindy Crawford), and Mike Meldman after Clooney and Gerber said they were looking to make their own "house" tequila for their properties in Cabo San Lucas. It was privately consumed for years before the distillery that made the tequila told Clooney and Gerber there was an opportunity to expand the spirit beyond private parties.
That bid to make Casamigos a household name has worked. Diageo said that the brand shipped 120,000 cases last year, mostly in the U.S., with a compound annual growth rate of 54% in the last two years. Casamigos is on track to reach over 170,000 cases by the end of this year. It is also a relatively expensive offering within the world of tequila: Mahlan says the range in price for Casamigos' three expressions is between $45 to $55 a bottle.
Tequila has been a strong-performing category in the U.S. in recent years. Since 2002, the Mexican import's volume has grown 121% at an average of 5.8% per year, according to industry tracker the Distilled Spirits Council. Last year, 15.9 million nine-liter cases were sold in the U.S.
Diageo said that the brand's owners will continue to promote Casamigos and provide their "leadership and vision" even after the takeover occurs. "We are delighted that the founders will have continued involvement and active participation in the future success of Casamigos," the liquor giant said in a prepared statement. "This, combined with the strengths of Diageo, will ensure the continued momentum of the brand in the US as well as realizing the growth opportunity from international expansion."
During the conference call, Mahlan was also asked about the justification on price. There had been rumors Casamigos was looking for a buyer and the price was seen at the time at around $500 million—deemed by some outside experts to be too high. Mahlan said Diageo purposefully structured the transaction with an earn-out that means $300 million won't be paid unless the brand lives up to its potential. She added that high-growth businesses like Casamigos are hard to value, but because the brand is still so small and has almost no sales outside of the U.S., there is a lot of potential to boost sales over time.
In a prepared statement e-mailed to Fortune, co-founder Gerber said " We created Casamigos Tequila 4 years ago for us to drink personally and selling it for 1 billion dollars is something we never could have imagined. We remain committed to our brand and look forward to our future with Diageo and continuing our work with our dedicated and passionate Casamigos team."
The Casamigos acquisition is expected to close in the second half of 2017. It will be neutral to Diageo's earnings for the first three years and is expected to add to profitability after that. The purchase will be funded through existing cash and debt. The deal represents the second major acquisition by Diageo in the tequila space in less than three years—following the company's move to swap out Bushmills Irish whiskey to instead get full control of Don Julio tequila back in 2014.