Arnault row may jeopardise Guinness deal

The proposed pounds 24bn merger between Guinness and Grand Metropolitan was dealt a potentially fatal blow yesterday when a simmering dispute between Guinness and the key shareholder, the luxury goods group Moet Hennessy Louis Vuitton, broke into the open.

Bernard Arnault, the LVMH chairman, who was the only member of the Guinness board to vote against the merger, said the deal would constitute a change of ownership of Guinness and therefore trigger clauses in the joint venture arrangements signed between the two companies three years ago.

Under those agreements, LVMH has the option to purchase, at net asset value, Guinness's interest in all their existing joint ventures if there is a change of control. LVMH also says it would have the right to repurchase the 34 per cent stake in Moet Hennessy from Guinness at a discounted price. The LVMH statement said it would exercise its rights if the deal goes ahead.

If the attempt succeeded, LVMH would operate the joint ventures independently and have the right to market and distribute Guinness brands in key markets such as China, France, Hong Kong, Singapore and the US for the least 10 years.

Guinness dismissed the claims saying: "We are completely confident that there is no basis for this assertion." The company said it had had five teams of lawyers working on the deal and would not have pressed ahead with the merger plans if it had not been confident that it would withstand legal challenge. However, it is likely that the claims will seriously delay the merger which could now be subject to lengthy litigation in French courts.

While some analysts described Mr Arnault's action as little more than "spoiling tactics", others said it could place the Guinness-Grand Met merger in serious jeopardy. "I think it will delay and disrupt the deal with lengthy legal proceedings in prospect," said Charles Winston, drinks analyst at HSBC James Capel. "The chances of it going ahead in its current form are now much reduced." Another said: "Guinness will have to consider the cost of giving up control of its brands that are distributed in some of the world's key drinks markets. It would seriously dent its income stream."

Analysts were speculating that Guinness might pay LVMH to agree to not exercise its rights, with some mentioning a figure of pounds 1bn.

However, John Beaumont of Merrill Lynch said Mr Arnault's broadside did not represent a "deal-breaker". He said the challenge was unlikely to stand up in court as the clauses in the joint venture were included to act as a deterrent if Guinness was the subject of a hostile takeover, not an agreed merger. "It is more likely that this is an attempt by Arnualt to try to get Guinness and GrantMet back around the negotiating table," he said

Yesterday's statement from LVMH hinted at this saying: "LVMH ... does not believe that shareholder value will be maximised by creating a conglomerate combining certain businesses with no common thread."

Mr Arnault had wanted Guinness to separate its beer activities from its spirits business to create a spirits giant in conjunction with LVMH. "This proposal remains open for discussion," the statement said.

Shares in both Guinness and GrandMet fell by more than 2 per cent on the news. Guinness fell 14p to 582p while Grand Met closed 15.5p lower at 581p.

Mr Arnault will chair the annual LVMH shareholders' meeting in Paris tomorrow. His relationship with Guinness has soured in the past year following his outspoken remarks on trading and share price performance.

Some analysts said he was trying to ensure that if the merger did receive regulatory approval then at least there would be significant benefits for LVMH.

"He does not appear to be against consolidation ... just the way in which Guinness and GrandMet have struck this particular deal," said Nick Williamson at Credit Lyonnais Laing.

Comment, page 23

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