George Clooney, Diageo, Rande Gerber

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.
Casamigos Tequila Founders George Clooney, Rande Gerber and
Partner Mike Meldman Celebrate The Launch of Casamigos At
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Andrea'sCasamigos Tequila founders Rande Gerber and George
Clooney celebrate the launch of Casamigos at Andrea's at Encore Las
Vegas on January 9, 2013 in Las Vegas, Nevada. Photo by Denise
TruscelloWireImage/Getty Images

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."

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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.

George Clooney, Diageo, Rande Gerber

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.
Diageo said on Wednesday it would pay $700 million initially for the
company, co-founded by the American actor, with potential payment of
a further $300 million linked to performance over 10 years.

The deal comes two weeks after Pernod Ricard (PERP.PA) took a stake
in mezcal maker Del Maguey, and highlights the opportunity companies
see in Mexico's native spirits.

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A new spate of high-end tequilas has helped the drink transcend its
traditional image as a party beverage for young drinkers. Its sales rose
5.2 percent globally last year, according to data tracker IWSR,
outperforming a spirits industry that edged up only 0.3 percent.

Casamigos, which means "house of friends," was founded in 2013 by

Clooney and his friends - nightlife entrepreneur Rande Gerber, who is
married to model Cindy Crawford, and real estate developer Mike
Meldman. They will continue to promote the brand.

Diageo, which has arrangements with other celebrities including David

Beckham and Sean Combs, said Casamigos will be neutral to earnings
for the first three years and add to earnings thereafter.

The brand sold 120,000 9-litre cases in 2016, primarily in the United
States, and is on track to reach over 170,000 by the end of the year.
Diageo said expanding the brand to Europe would be a source of future
growth.

The company did not provide revenue or earnings figures for the
business. Its North American president, Deirdre Mahlan, told reporters
that companies like Casamigos, which are growing fast with lots of
room ahead, were "notoriously challenging to value under traditional
methods".
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When asked about rising tensions between Mexico and the United
States, Mahlan said she did not anticipate any barriers that would stop
Diageo from continuing to grow its business.

Diageo's other tequila brands include Don Julio, DeLeon and Peligroso.
It distributed Jose Cuervo outside of Mexico until 2012, following its
failure to strike a deal to buy it outright from the brand's founding
family.