Bluechip: GMG - a mixer with a kick

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The Independent Online
Much was made of the unlikely coming together of a Japanese stockbroker, in the shape of Nomura, and a sizeable collection of British public houses, courtesy of the sale of its remaining tied estate by Grand Metropolitan. Less, however, was made of the likely impact on the seller.

For a net loss of pounds 54m however, GrandMet has freed itself of an estate that has dogged its balance sheet as a somewhat pedestrian and unexciting collection of assets, with the added hassle of a pile of writs from disgruntled tenants.

The sale of Inntrepreneur, however, is only a blip compared to the main event: its pounds 23bn merger with Guinness. The new company, GMG Brands, would be one of the world's largest drinks companies. The deal, announced in May, has been dogged by delays, mainly over regulatory matters. It has also been accompanied by a wily, and sometimes acrimonious flanking action by Bernard Arnault, of the French luxury goods-to-cognac business LVMH. It seems likely that Mr Arnault's appetite for a slice of the action will have to be appeased. Concessions to the regulators could include hiving off Dewar's, while Mr Arnault may gain other entitlements.

And the EU has already voiced concerns that the combined group will have in excess of 40 per cent of the whisky market in some European markets, which is thought to mean Spain and Greece. Although significant markets, these should not provide any overwhelming obstacle to a successful culmination. Nor should US concerns, which are largely similar, quash the prospect of a merger going ahead.

Recent reports suggest that momentum for the merger is gathering pace. At the most recent set of figures from Guinness, chairman Tony Greener affirmed that Brussels was set to deliver its decision on the anti-competitive threats of the merger by January.

There is every likelihood that some disposals will be a condition for proceeding, probably among the spirits brands, where there is considerable overlap.

Even with sweeteners for LVMH and the regulatory authorities, the deal will have some compelling arguments in its favour. Spirits from GMG will be cheaper; market share will rise, and the improved cash flow can be used to maintain and expand the brand positioning of the premium products.

There should also be cost savings of around pounds 175m out of the merger, hitting pounds 245m by the turn of the century. At 578.5p for Guinness, and 580.5p for Grand Metropolitan, the shares are trading almost at parity. This is as it should be, as shareholders will get one share in the new group for every share they hold in either of the two companies. On this basis, the view from the market is that GMG is a done deal.

Should this be so, the future for one of the great spirits combines in the world must offer scope to investors. While spirit margins have been under pressure in the last few years, expanding global trade, increased consumption in Asian markets, and better marketing, suggest a bright future for the business. Buy.