Allied is also in talks with other large drinks groups around the world and could now look to forge several distribution agreements with different partners on a country-by-country basis. Such a move would still create a strong portfolio of best-selling brands and bring the promise of substantial long-term benefits for Allied Domecq.
Allied has initiated the talks with rivals in an effort to create a new force in the world-wide drinks industry to take on the might of Guinness and Grand Metropolitan. They merged last year to create Diageo and now have a dominant position in the world-wide spirits market.
A merger of Allied and Seagram's drinks businesses would have created the largest spirits group in the world with annual sales of more than pounds 4bn and a bewildering array of top brands. Allied owns Beefeater gin, Teacher's and Ballantine's whisky, Courvoisier cognac and Sauza tequila.
Seagram counts Chivas Regal whisky, Martell cognac and Mumm champagne in its portfolio.
But Seagram is understood to be unwilling to give up majority control of its spirits business. Instead of a merger the two groups are now likely to make do with a partnership in North America, where they will jointly market and distribute these leading brands.
This would fail to generate the sort of cost savings a full merger with Seagram was likely to have accomplished.
Allied, however, may choose to team up with other drinks groups in areas such as Asia, a vital market for the industry. It is holding talks with Bacardi, the US group which owns the world's most popular spirits brand, and Pernod Ricard, among others, about further distribution deals.
Allied's talks with Seagram have stalled due to the Canadian group's insistence that it does not want to lose control of its spirits business, according to industry sources.
Allied's spirits business is bigger than Seagram's, with annual sales of pounds 2.5bn compared with pounds 1.6bn. On that basis, Allied could have expected to have gained a majority share of a merged group. However, the Bronfman family, who run Seagram, are believed to be unwilling to allow Allied to have a majority holding.
"Edgar Bronfman (chairman of Seagram) was never going to give up control of the spirits business lightly and it looks like Seagram have been dragging their feet on a merger," said on industry source.
A full drinks merger with Seagram is still the preferred option for Allied and it could yet pull a deal out of the bag, but such a move is becoming increasingly unlikely.
Any merger or distribution agreement may not be finalised for months. Even so, Allied maintains it is under no pressure from its institutional shareholders to do a deal and it continues to talk to everybody in the industry. Seagram is also exploring other options.
"Diageo has set the cat among the pigeons and everybody is talking to everybody else," said one analyst.
Allied's shares fell 16p to 554p on Friday but have risen from 407.5p last year on hopes of a drinks deal.Reuse content