City glum as Allied rules out demerger

Allied Domecq disappointed the City yesterday by ruling out a demerger of its Beefeater gin to Ballantine's whisky spirits arm from its pub and fast food retailing operations. Investors had hoped new chairman Sir Christopher Hogg would treat Allied to a re-run of his successful break-up of Courtaulds in 1990, writes Tom Stevenson.

Spelling out the reasons for shunning what Sir Christopher called the "seductive option", he made clear that Allied's current management, especially Tony Hales, chief executive, was under notice to improve the performance of the group or make way for others to do the job. Assessing the ability of Allied's executives was, he said yesterday, his biggest challenge.

He was speaking as Allied Domecq announced an 11 per cent fall in pre- exceptional profits as de-stocking in the US hit its more important spirits operation. Despite expectations that it would be cut, the full-year dividend was maintained at 23.6p but the shares closed 14p lower at 454p as shareholders gave up hope of quickly realising Allied's estimated break-up value of about 550p.

Sir Christopher said Allied was "a fine group with good assets - human, tangible and intangible. But it must improve the returns it delivers to shareholders. A huge amount of restructuring is behind us and the major internal reorganisations on both sides of the group are facilitating real improvements in performance."

He added that he had resisted the temptation to bow to considerable pressure from investing institutions that had started to view demerger as a panacea for Allied's problems because the cost would be unacceptable in terms of fees and in potential tax inefficiencies for the spirits arm, which would not earn enough profits in the UK to offset its advance corporation tax liability.

Investment column, page 19