No Pain, No Gain: Taking on Bacardi could boost Allied's spirits

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The gossipy drinks business is getting itself into a ferment over the possibility that Allied Domecq will soon be engulfed in another round of takeover activity. Shares of the world's second-largest wine and spirit group are riding at around their highest since they were recruited into the no pain, no gain portfolio in 1999.

Under the chief executive Philip Bowman, the Teacher's Scotch whisky to Beefeater gin group has, although operating in the shadow of Diageo, made sound rather than spectacular progress. Further headway should be achieved this year. On trading grounds there is little doubt the shares are still worth buying. But I would be surprised if the trading outlook influences many of the investors now alighting on them; they are more interested in reaping rewards from corporate action.

The family drinks firm Bacardi is seen as instigating the Allied revolution. The Castro regime forced it to flee its native Cuba and set up shop in Bermuda. It is now one of the world's top spirit groups, taking in Scotch whisky and gin as well as the rum on which its fortunes were founded in 1862.

The 600 family shareholders realise that if Bacardi is to continue in the forefront it needs more firepower than an unquoted company can command. After all, the rum producer was unable to make any impression in the auction for the Seagram drinks cabinet even though it teamed up with Brown Forman, the US drinks group. Seagram eventually fell to a partnership of Diageo and Pernod Ricard of France. In the past year the Bacardi dynasty has made it clear it is prepared to surrender overall control. The question is whether it will opt for a share flotation or merger with another drinks empire. And that is where Allied enters the equation.

There is little doubt some strong influences within the Bacardi family are favourably disposed towards Allied. So if a tie-up with an existing group is seen as the way forward Allied must be a strong candidate. Brown Forman is also a possibility, but other major drink players are unlikely to feature. Diageo is far too big to contemplate any further major swallows and Pernod is hardly flavour of the month in Bermuda, with Bacardi disputing its right to sell a rum called Havana Club.

Of course Pernod could further upset Bacardi by moving for Allied. It might, however, have difficulty finding sufficient ammunition, with Allied capitalised at £5.1bn. And its Scotch whisky operations could represent a monopoly problem.

Allied avoided the Seagram auction. Instead it decided to increase its wine interests, a move which, so far, seems to have met with some success. The group was once a powerful brewer, one of the big six that dominated the UK beerage. But after the 1989 Beer Orders it first stopped brewing and then sold its pubs. Scottish & Newcastle is the only big-six player to survive as a brewer. The others have either disappeared or fallen under foreign ownership. Like Allied, Scottish is a constituent of the no pain, no gain portfolio. It is also under takeover threat.

Now Britain's only player on the world beer stage, Scottish has looked vulnerable for some time. The proposed merger of Interbrew of Belgium and AmBev of Brazil, which will create a new world number one, must increase the pressure. The new combination will replace Anheuser-Busch, the American group, as the world's head brewer. Anheuser has reigned for years, so it will be interesting to see whether it is prepared to surrender its title meekly.

The Americans are not noted for buying other brewers. But the Belgium/Brazil alliance could stir them into action. And a bid for Scottish could be on their agenda. In any case, the arrival of InterbrewAmBev is likely to provoke corporate activity among other global groups, with Scottish in the line of fire.

With Safeway's departure, Allied and Scottish represent the portfolio's only Footsie shares. Allied is near to serving up a double gain; Scottish, although just in profit, has been (nearly) as flat as yesterday's pint. Still, if bid action overwhelms one or both, the portfolio will have cause for a boozy celebration.

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