Arnault drops opposition to Guinness/GrandMet deal

The main threat to the pounds 24bn merger between Guinness and Grand Metropolitan was removed yesterday when the two UK drinks companies reached an agreement with Bernard Arnault, the head of French luxury goods group LVMH who, until now, has been hell bent on scuppering the deal.

Andrew Yates reports on how the record breaking drinks merger is now virtually certain to go ahead.

Mr Arnault has called a truce in his fierce battle to overturn the merger between Guinness and GrandMet. After months of secret and heated negotiations which involved regular meetings between Mr Arnault and senior executives at Guinness and GrandMet, the two sides eventually thrashed out an agreement at 7pm on Saturday evening.

Guinness has agreed to pay Mr Arnault's LVMH group a lump sum of pounds 250m cash. The Frenchman will also receive another pounds 250m by way of a special dividend when the merger takes place early next year.

Mr Arnault will also take up a seat on the board of the combined drinks company, to be called GMG Brands, as a non-executive director.

In return, GMG Brands will be allowed to distribute LVMH's spirits brands such as Moet & Chandon Champagne and Hennessy cognac around the world.

GMG Brands believes the deal will save it pounds 20m a year on top of the pounds 175m cost savings the merger is already expected to bring. Mr Arnault also expects to reap savings of pounds 20m, a third of which will find its way back to Guinness which owns a 34 per cent stake in Moet-Hennessy, the spirits business of LVMH. GMG Brands also believes the agreement will lead to a substantial rise in spirits revenues.

The agreement is also likely to have saved each group millions of pounds in legal and advisers' fees. Mr Arnault has called a halt to what promised to be a lengthy legal action against GMG Brands that could have cost the merged drinks group more than pounds 1bn in compensation.

Mr Arnault has dropped his demands for a 35 per cent stake in a separately quoted drinks company and the demerger of GMG's non-spirits businesses such as Burger King and Guinness' brewing division.

The dispute between GMG Brands and Mr Arnault started when the merger was announced in May and developed into a very bitter and public row

Mr Arnault has spent more than pounds 1bn buying up GrandMet shares to obtain a stronger position at the negotiating table in his determined attempt to scupper the original deal. He has also lobbied a host of institutional shareholders in Guinness and GrandMet on both sides of the Atlantic to garner support for his alternative merger plans.

LVMH is currently the largest shareholder in both the UK drinks group's with a 11.1 per cent stake in GrandMet and a 11.4 per cent holding in Guinness. This would entitle Mr Arnault to a stake of just over 11 per cent stake in GMG.

John McGrath, chief executive of GrandMet, said yesterday: "There were a lot of public histrionics which were not very dignified. Over the last few months we have had a whole series of private meetings to sort out an agreement. This is not a pay-off. It is an evolutionary deal ... that enhances shareholder value."

Tony Greener, chairman of Guinness, added: "This comes as a great relief. It gives us more flexibility and we can introduce new brands around the world."

The agreement removes the main obstacle remaining for the merger, which will create a huge force in the world-wide drinks business, bringing together a vast collection of famous brands including Smirnoff Vodka, Gordon's Gin and Johnnie Walker whisky.

However, the deal still has to be cleared by the European Commission and the Federal Trade Commission in the US. Both are likely to demand GMG gives up some of its Scotch whisky brands. If the merger gets the green light it should be completed by January.

Philip Hawkins, a drinks analyst a Merrill Lynch, said: "This is a pragmatic agreement. LVMH, which has had its own trading difficulties in the Far East, realises it was better off with the two strongest rivals. And the deal looks cheap for GMG Brands at twice the price."

GrandMet's share price jumped 21p to 604p and Guinness' shares rose 28.5p to 605.5p.