Whose round is it? Drinks giants back in the merger mixer

Pernod's £7.6bn swoop for Allied could be just the start of a deal binge. Abigail Townsend sees who might be buying and who selling out
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The Independent Online

So says Ian Shackleton, drinks analyst at Lehman Brothers, commenting on the consequences of the £7.6bn takeover by Pernod Ricard of Britain's Allied Domecq. Last week, French investors backed the deal; tomorrow it is the turn of Allied's shareholders to give, as expected, their approval.

The deal will propel Pernod into the big league, allowing it to take on Diageo, the world's biggest drinks company. A number of Allied brands will be offloaded, mostly to Fortune Brands (its bid partner) and Diageo, and then Pernod boss Patrick Ricard will set about integrating the businesses.

Most agree that is likely to be tough. "Allied-Pernod was a deal likely to happen, and I thought it would have been a merger to be honest," says Nigel Popham at broker Teather & Greenwood. "Yet it will be interesting to see how it pans out. It will take some time to integrate the businesses; they are two very different cultures."

Long term, however, and few doubt Mr Ricard's ability to pull it off. Instead, the real story of what happens next lies elsewhere in the industry: most believe Pernod's acquisition of Allied is not the deal to end all deals, but the start of a round of mergers and acquisitions.

It is nothing new in this sector. The first big deal of recent times was the merger of Guinness and GrandMet in 1997 to form Diageo, after which came the Seagram sale in 2001. The Canadian company was broken up between Pernod and Diageo in a £4.3bn deal, although Allied snapped up the odd brand as well. The industry then braced itself for the next deal, but it failed to emerge.

After Pernod's swoop on Allied, though, things are likely to be different. "It's right to say this transaction is a catalyst," says Mr Shackleton. "Previously we have had big deals like Seagram, when people thought it would be a catalyst but it didn't follow through.

"So why is it different this time? For a start, we have quite a few companies - particularly the members of the consortium that failed to get Allied - that have clearly stated they are buyers of assets. We have also seen a re-rating of asset values, so if you are a family who fancies cashing in some of the family jewels, now is probably a very good time."

Conversely, that means assets are more expensive for would-be acquirers, although this is unlikely to put off those keen not to be left trailing in Diageo's and now Pernod's wake.

Because this industry is all about economies of scale. Costs are at their heaviest in distribution - getting the goods to the shops, bars, clubs and restaurants - and marketing - getting the consumer to drink them once there. This is particularly true in the burgeoning US market, where rules on alcohol dating back to the days of prohibition mean producers are not allowed to distribute their own product.

So the larger, and more powerful, the company, the better the deals they are able to strike with distributors.

And the American market is where everyone wants to be. Spirits are going through the roof and starting to outstrip sales of beer. It is considered the fastest-growing spirits market in the world; in its last financial year, Allied generated around 50 per cent of its trading profits in North and South America.

Pernod is strong in Europe, but here spirit sales are easing off, and in its pre-deal state, it has trailed Allied and Fortune in the US.

Competition is tough, however, and Pernod itself will help bolster one of its rivals. The Illinois-based Fortune, owner of Jim Beam bourbon, will double its wine and spirits sales through its participation in the deal. One of the brands that Pernod plans to sell on, for example, is Sauza, leaving it without a tequila.

The deal will vault Fortune from seventh to fourth in the global spirits business by case volume, just behind Bacardi. Pernod will be number two.

Bacardi, meanwhile, has been courted by Allied in the past, though the suitor was frustrated by the complex family shareholding structure. The Bacardi family is renowned for barely getting on, but with the industry reshaping, it is unlikely to want to get left behind.

Once thought to have considered bidding for Allied itself, Bacardi has appointed a new chief executive, Andreas Gembler, a former boss of tobacco giant Philip Morris International. He is known for his experience in emerging markets, another key area of growth for the drinks industry.

There will also be a number of individual drinks available, such as the "tail" brands in Allied that Mr Ricard has already said he wants to sell. And smaller industry players could be up for grabs as well: the French champagne house Taittinger, for example, is currently considering a sale.

The real question, though, is whether there is another transforming deal to be done. The answer, at this stage at least, is: maybe. Bacardi, LVMH - owner of Moët & Chandon champagne and Hennessy brandy, among other premium brands - and Japanese drinks group Suntory were thought to be looking at a combined bid for Allied; a Bacardi and Brown-Forman tie-up is seen as a possibility and would be significant; and Rémy Cointreau and Campari remain potential acquisitions - both have market values of nearly €2bn (£1.4bn).

And do not think Diageo will be left out. Its acquisition of Allied's Montana will give its wine business a much-needed boost, and it has a brewing interest in Guinness.

Everyone - from the blue-chip Diageo to the family-owned, tradition-steeped Taittinger - seems set to ensure that consolidation does not begin and end with Pernod Ricard.

THE BIG NAMES AND THE BRANDS THAT COULD CHANGE HANDS

Rémy Cointreau

The Parisian owner of Rémy Martin brandy has said it is perfectly capable of competing without mergers or acquisitions. But that does not mean it is not a target - just as long as the controlling Heriard-Dubreuil family and Pierre Cointreau, with 13.6 per cent, are prepared to sell.

Campari

First-quarter sales jumped at the Italian group, and it is planning a European marketing push for Campari and Cinzano. It sells in 190 countries, however, and following its 2001 listing, the group now has a market value of €1.8bn (£1.2bn).

Taittinger

The family owners of the champagne house will decide this month whether to sell up. They have received offers, appointed banks to evaluate the approaches and, although quick to say that they won't sell at "any price", a number of family members are understood to want to retire, while others are facing high tax bills.

Vin & Sprit

The Swedish state-controlled group's main asset is Absolut vodka. The government insists it has no plans to relinquish control, but it is accepted that a sale will happen at some point.

Spirits International (SPI)

The SPI-owned Stolichnaya vodka ranks third by volume in the US, and Allied Domecq is its distributor. However, the Russian government is suing, claiming that the UK company does not have the right to distribute it, as part of a wide-ranging row over ownership.

Maxxium

The Scotland-based group distributes drinks for companies including Rémy Cointreau, Vin & Sprit and Fortune Brands. Its future is in the spotlight following the Allied deal because Courvoisier, which Fortune is buying, competes directly with Rémy Martin. Maxxium's break clauses are, says one analyst, "pretty punitive".

Bacardi

The business is owned by around 600 shareholders but decisions are often scuppered by family feuds. At least two attempts to float have fallen by the wayside, although the family did agree on last year's acquisition of Grey Goose vodka.

Brown-Forman

The US group was part of the consortium led by Constellation Brands in its failed bid for Allied. It has long-standing distribution agreements with Bacardi and, as they both have big family stakes, they are seen as possible merger partners.

Fortune Brands

The US group is waiting to hear whether the US authorities will allow it to buy Canadian Club whisky and Makers Mark bourbon from Pernod, among other brands. It would cost $5.3bn (£2.9bn), but it would be catapulted into big league.

Diageo

Despite being slightly sniffy about wine, there has since been a change of heart and it will add Montana to its growing portfolio. And then there is Guinness, an asset either to be sold or built on.

Constellation Brands

The US giant had snapped up wine business Mondavi before making its move on Allied, and seems to remain interested in boosting its wine assets, as well as developing a substantial spirits business

Pernod Ricard

Future acquisitions have not been ruled out. Pernod is thought to be looking next at family-owned brands in the burgeoning markets of Asia and South America.

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