Jose Cuervo stays in local hands as Diageo deal breaks down

British drinks giant Diageo will not be purchasing Jose Cuervo and will end its international distribution deal with the Jalisco-based company next year.

For most of this year Diageo has been in ongoing discussions with Cuervo – the world’s biggest selling tequila brand and the oldest distillery in Mexico – over their relationship.

Diageo, which owns major brands such as Johnnie Walker, Buchanans, Smirnoff, Captain Morgans and Baileys, had been widely expected to complete a deal worth around three billion dollars with Cuervo’s Mexican owners, the Beckmann family. But the Beckmanns are understood to have valued Cuervo at up to 500 million dollars more than Diageo, who were concerned that a significant investment would be required to improve margins and boost falling sales in the United States.

On Tuesday, Diageo announced that months of fruitless negotiations had come to an end.

“It has not been possible to agree a transaction which delivers value for Diageo’s shareholders and therefore, by mutual agreement, we have terminated our discussions,” said Diageo chief executive Paul Walsh.

Diageo has been distributing Cuervo outside Mexico since 1986 in a deal that made up around three percent of Diageo’s group sales. Once this relationship expires in June 2013, Cuervo will distribute its liquor in the United States – its primary export market – through its own subsidiary, Proximo Spirits.

Diageo, meanwhile, will maintain its 50-percent share in Don Julio, focusing on the smaller but faster-growing customer base at the high end of the tequila market. The breakdown of negotiations has also fueled speculation that Diageo could attempt to acquire the U.S. Beam spirits group which owns the world’s number-two tequila brand, Sauza.