Diageo shot at in Caribbean rum war

Diageo PLC accused rival Bacardi Ltd of trying to drive its Captain Morgan rum production out of the United States in order to protect its own substantial rum subsidies from the Puerto Rican government.

Guy Smith, executive vice president of Diageo North America, said in a news release that Bacardi is leading a "hidden campaign" to drive Diageo's Captain Morgan rum production out of the US Virgin Islands (USVI), a move he said would "destroy" the territory's economy.

Diageo has a deal with the USVI involving a new rum distillation facility on St Croix where it will produce Captain Morgan rum for at least 30 years, starting from 2012 when its contract with Puerto Rican rum producer Destileria Serralles runs out.

Last week, the National Puerto Rican Coalition (NPRC) said that Diageo would get $2.7 billion in US taxpayer-funded subsidies for the move. It quoted Felix Serralles of the Puerto Rican liquor company as saying the subsidies "will be almost twice the cost of production of the rum".

US law allows special rebates on excise taxes on rum to local governments based on production levels.

The rebates are given to the US island's governments, which in turn give a portion to rum producers as assistance. When Diageo moves its output to the Virgin Islands, Puerto Rico and its major producer Bacardi would lose a significant chunk of financial support.

Diageo's Smith said that Bacardi is a supporter of the NPRC and accused it of "using a campaign of misinformation to get Congress to retroactively overturn" its US Virgin Islands initiative.

He also said the NPRC is urging the Hispanic community in Puerto Rico and throughout the United States to boycott Diageo goods.

Smith said Bacardi gets "tens of millions of dollars" in annual subsidies and knows that "because of a quirk in federal law they can protect their huge government subsidies by driving Captain Morgan rum production anywhere rather than the US Virgin Islands."

Smith said Bacardi officials and lobbyists have visited US Congressional leaders and Puerto Rico officials to discuss opposing its move.

The NPRC sought to dismiss Diageo's claims that it was a "front group" and called Diageo's expected benefits from the deal "excessive, unreasonable and wrong".

Privately held Bacardi said the issue was about "the appropriate use" of US taxpayer money.

"This isn't about where Diageo receives a free distillery, but about the proper use of federal tax dollars," said spokeswoman Patricia Neal in a statement on behalf of Bacardi.

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