Sources: Diageo in Talks to Buy Turkey's Mey Icki

Diageo 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 (1.5 billion pounds) 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 similarities 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 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% 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 (NYSE:JPM), Goldman Sachs (NYSE:GS), Credit Suisse and Bank of America Merrill Lynch (NYSE:BAC) to run the IPO, a source close to the deal previously told Reuters.

Diageo and TPG declined to comment.