Diageo unifies Smirnoff France and Russia

LONDON - A deal between Smirnoff parent Diageo and the Russian maker of Smirnov has reunited the two legendary vodka brands after a gap of nearly 90 years.

The drinks giant Diageo has signed a joint venture with Russia's Alfa Group's A1, the owner of the Smirnov Trading House.

Upon completion of the deal, Diageo will pay US$50 million ($75.8 million) for a 75 per cent share of the fast-growing Smirnov brand and business.

Smirnov will join Diageo's portfolio of spirits - which includes Johnnie Walker whisky, Captain Morgan rum and Jose Cuervo tequila - within the newly formed company.

It uses the original recipes concocted by Piotr Arsenyevich Smirnov, who opened a distillery in Moscow in the 1860s and later became the official vodka supplier to the tsars.

After the Bolshevik revolution of 1917, when all private property was confiscated and the distillery turned into a state-owned garage, one of Smirnov's sons fled Russia and established Smirnoff in Paris, using the French spelling of the family name.

In Russia, the original vodka brand was revived by the Smirnov Trading House in 2002.

The new operation's distribution arm, Diageo Distribution ZAO, will be the exclusive distributor of Diageo's spirits brands and Smirnov vodka in Russia. The new business is expected to employ between 250 and 300 people - a big step up for Diageo, which at present employs around 30 people in Russia.

Morgan, the president of European operations at Diageo, said the venture "creates a strong foundation for our joint ambition to become the leading spirits business in this market".

With sales in Europe flat, Diageo is pushing east and recently reported a 41 per cent jump in first-half sales in Russia. Across the globe, its best market was the US.

Last year, Smirnov sold 220,000 of its 9-litre cases of vodka in Russia, while Smirnoff sold 25 million 9-litre cases globally.

The venture is expected to be up and running by July and requires approval from Russian regulators.

Alfa is run by Mikhail Fridman, Russia's second-wealthiest man with a fortune worth US$11.4 billion, according to a list published by Moscow-based Finans business magazine on February 13.

Russian real incomes rose 8.8 per cent last year after gaining almost 9.9 per cent in 2004.

Michael Bleakley, an analyst at Credit Suisse in London, said in a note to investors published last month that higher-priced spirits and beer brands "are seen to be consumed almost as a fashion statement" in Russia, China and Eastern Europe.

- INDEPENDENT, BLOOMBERG