Diageo ditches Absolut Vodka in favour of Dutch rival Ketel One

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Diageo, the world's biggest drinks maker, has abandoned its pursuit of Sweden's Absolut Vodka after buying into its Dutch rival, the vodka brand Ketel One.

Diageo, which owns alcoholic brands including Smirnoff, Johnnie Walker and Guinness, is to set up a new company with the Nolet family, which will control Ketel One. It has agreed to pay $900m (£460m) for a 50 per cent equity stake in the venture.

Chief executive Paul Walsh last year said Diageo was considering an approach for Absolut, but the tie-up with Ketel means it has dropped its interest. A spokeswoman for Diageo said: "We did register our interest in Vin & Sprit last year, because we want to target the super-premium vodka market, but we never submitted a bid."

She said Ketel One had huge expansion opportunities. It sells about 1.9 million cases a year, with 97 per cent of those sales made in the US. She added that Diageo plans to roll the brand out in South America, Asia and Europe.

The joint venture means the Nolet family will continue to own the brand rights for Ketel, and Diageo will become the exclusive distributor worldwide. The family has been distilling in Schiedam, Holland since 1691. Today, the 180-strong operation is run by Carel Nolet, the 10th generation of the family.

Sales in the super-premium vodka market have grown at 21 per cent a year for the past decade. The deal is a good fit for Diageo, which already owns Smirnoff in the premium space, and Ciroc, which is classed as ultra premium. William Hobbs, an equity analyst at Barclays' wealth research division, said the move would not make a significant impact in the short term, though he added "this does give Diageo much-needed strong brand presence in the vodka category".

Vin & Sprit is on the block after the Swedish government announced it would sell the spirits group as part of its Skr200bn (£16bn) asset sell-off, announced at the end of 2006.

The auction was launched in December, with analysts valuing the group at between $5bn and $6bn. Pernod Ricard, Bacardi and Fortune Brands are among those understood to be in the race. The Swedish government is thought to be close to an announcement revealing the preliminary shortlist of bidders.

Last week, Diageo announced it had bought the US winemakers Rosenblum Cellars, which produces Zinfandel and Rhone wines, in a deal worth $105m.