Arnault waters down merger proposals

Bernard Arnault was yesterday forced to make an embarrassing climbdown just 24 hours after he launched an audacious attempt to scupper the pounds 23bn merger between Guinness and Grand Metropolitan.

Fierce criticism by institutional shareholders in Guinness and GrandMet has forced Mr Arnault to amend his alternative plans to merge the drinks businesses of the two UK companies with the Moet Hennessy champagne and Cognac operations of his French luxury goods group, LVMH.

Mr Arnault yesterday conceded that his demands for a 35 per cent stake in a merged drinks group, which would include the IDV business owned by GrandMet and the United Distillers arm of Guinness, were excessive. "We would be willing to accept a lower stake in the combined spirits business. The 35 per cent figure is a figure derived from the value of our assets against the market's assessment of the value of the combined spirits company. We could accept a stake lower than 30 per cent and we would consider taking a cash payment for some of our assets," said a LVMH spokesman yesterday.

Guinness and GrandMet still looked set last night to spurn a three-way merger of the drinks businesses and plough on with their own straight merger even though Mr Arnault is prepared to reduce his stake.

"Even if he had a 20 per cent stake he would still have a majority holding in the spirits business where most of the cost savings would be had and where the growth potential is the greatest. A demerger of our food and brewing businesses would destroy value," a GrandMet spokesman said yesterday.

An overwhelming number of big investors in GrandMet, headed by George Bull, and Guinness, led by Anthony Greener, said privately they would reject Mr Arnault's original proposals that would have given him a commanding shareholding.

Most of the UK companies' institutional shareholders believe a straight merger between Guinness and GrandMet offers the best deal and are not willing to entertain the idea of a three-way merger of the spirits businesses. Mr Arnault, despite being the biggest individual shareholder in Guinness and GrandMet, would need the support of these institutions to push his plans through.

Andrew Hartley, a UK fund manager at Scottish Equitable, which owns shares in GrandMet, Guinness and LVMH, said yesterday: "Mr Arnault makes deals that sometimes work and sometimes don't. We have no argument with his style which is why we have a holding in LVMH. But it is unlikely to work in this case. I think Mr Arnault's attempts will fizzle out. He has paid an awful lot of money to get this far and LVMH has not got the financial muscle to stop a merger."

Mr Arnault has splashed out more than pounds 800m buying a 6.4 per cent stake in GrandMet to get a seat at the negotiating table.

Another large shareholder of GrandMet and Guinness said: "Mr Arnault has tried to drive a wedge between shareholders and GrandMet and Guinness but it will not succeed. The idea of a transferring lots of value to Mr Arnault is ridiculous. GrandMet and Guinness should press ahead with their straight merger."

Some institutions were willing to entertain Mr Arnault's alternative proposals to split Moet Hennessy in two, giving GrandMet and Guinness control of the Hennessy cognac business and LVMH ownership of the Moet champagne operation.

"A split up of Moet Hennessy has a greater degree of logic," said Ralph Woodford, of Edinburgh Fund Managers.