UPDATE 3-Diageo in talks to buy Turkey’s Mey Icki-sources

* Diageo has expressed interest in Turkey’s Mey Icki-sources

* IPO option still open to TPG

* Diageo interest is preliminary-sources

(Adds details on Turkish taxes on raki)

By Victoria Howley and Simon Meads

LONDON, Dec 10 (BestGrowthStock) – Diageo (DGE.L: ) is in preliminary
talks to buy Turkish spirits company Mey Icki, people familiar
with the matter said, as part of the push by the world’s biggest
drinks company into high-growth emerging markets.

Diageo has expressed interest and could pay up to $2.5
billion for the dominant producer of Turkey’s anise-flavoured
national drink, raki, one of the people said.

A sale would give private equity owner TPG [TPG.UL] an
alternative to an initial public offering (IPO) and could
kick-start a dual track sales process.

“The talks are early stage, and it is unclear whether they
will lead to anything,” the person told Reuters.

Diageo has been pushing into fast-growing developing
markets, where it makes around one third of its profits, seeking
to tap into strong domestic brands and appetite for its range of
international spirits, including Johnnie Walker whisky and
Smirnoff vodka.

A deal for Mey Icki – pronounced May Ichki – would have
similiarities with Diageo’s drive to increase its exposure in
China, where it is bidding to take control of local group
Sichuan Chengdu Quanxing, increase exposure to domestic spirit
Baiju and secure better distribution for its own brands.

Mey Icki, Turkey’s leading spirits producer of Raki brands,
liqueurs, fruit vodkas and wines, has access to some 50,000
retail outlets across Turkey. Two-thirds of the country’s
population of 73 million are under the age of 32.

TAX SHADOW

A Diageo takeover of Mey Icki would nevertheless be complex,
and would require the resolution of a long-running dispute with
Turkey’s tax authorities over payment of customs duties, a
second person said.

Any buyer of Mey Icki will also have to contend with high
alcohol taxes, which prompted Danish brewer Carlsberg (CARLb.CO: )
to withdraw from the market in 2008.

The government has ramped up taxes on alcohol since taking
power in 2002, in October raising the tax on a litre of raki by
a further 30 percent to 51.48 Turkish lira based on 100 percent
alcohol — which amounts to around 23 lira or $15.3 per litre
bottle of the spirit.

A litre of Raki retails for around $35.

Many secularists in Turkey believe the tax hikes on alcohol
reflect the government’s religious conservatism.

The price of the business will have to reflect the fact that
taxes have been increasing, said Omer Omerbas, analyst at
Ekspres Invest in Istanbul.

But that should not deter buyers as alcohol consumption is
rising, Omerbas said.

“This is a country with a very young population, with an
increasing per capita spending which will affect consumption,”
Omerbas said, adding that consumption rates will not be as high
as in Western Europe.

Raki is a favoured accompaniment to fish and traditional
Turkish meze in the meyhanes or taverns of Istanbul. It is
mostly consumed with a meal and is associated with older,
well-heeled consumers.

TPG Capital, which acquired Mey Icki in 2006 for about $800
million, has been exploring an IPO of stock in the company.

It has mandated JPMorgan (JPM.N: ), Goldman Sachs (GS.N: ),
Credit Suisse (CSGN.VX: ) and Bank of America Merrill Lynch
(BAC.N: ) to run the IPO, a source close to the deal previously
told Reuters.

Diageo and TPG declined to comment.

(Additional reporting by Alexandra Hudson in Istanbul; and by
Jessica Hall and Megan Davies in New York; Editing by Will
Waterman and Andrew Callus)
(For more M&A news and our DealZone blog, go to
http://www.reuters.com/investing/news/mergers)

UPDATE 3-Diageo in talks to buy Turkey’s Mey Icki-sources