Comment: No easy way out of the Arnault impasse

After a whirlwind one-day tour, Bernard Arnault has left the City in no doubt about his intentions. He's going for broke. If Guinness and GrandMet continue to refuse to deal with him, he'll scupper their merger. This is a long game, he calculates, and he's prepared to sit it out.

These are no idle threats. His stake-building in GrandMet will soon put him in a position to block the merger. Moreover, the Frenchman's record in winning control of LVMH, and his more recent assault on Chateau d'Yquem in France, suggest he's perfectly comfortably with the idea of biding his time and weathering quite substantial short-term losses while he does so. Since Mr Arnault is rejecting all the compromise proposals suggested by John McGrath, chief executive of GrandMet, it's hard to see how Guinness and its partner can find a way out of the impasse.

Mr Arnault wants the drinks divisions of all three companies - Guinness, GrandMet, and his own LVMH - merged into a colossal menage a trois and then floated off separately on the stock market. He might be prepared to budge a bit on the 35 per cent shareholding in the new company he is demanding for his own interests, but the basic concept is not up for discussion. There are a number of reasons why this is likely to prove unacceptable to UK investors.

The first and most obvious is that Moet Hennessey is almost certainly not worth as much as Mr Arnault thinks it is. The second is that to merge these businesses while separately demerging processed food, fast food and brewing from GrandMet and Guinness would be a hugely costly, time consuming and complex business. These things are best taken one step at a time.

But the most fundamental objection remains that Mr Arnault would be left with a controlling stake in the new drinks company and that would be unacceptable to a large number of City investors. As a result, the company might never come to reflect its true value to outside shareholders.

The upshot is that the merger looks increasingly likely to run up against the buffers. Since Mr Arnault won't budge, and he won't vote for the merger as proposed, it is hard to see a way out of the impasse. For GrandMet, the best policy might be to walk away. It was Guinness that brought the wily Frenchman to the party in the first place. They made their bed, now let them lie in it, Mr McGrath must be tempted to think. Perhaps the biggest irony of all this was that when the cross-shareholdings between Guinness and LVMH were first established in the 1980s, part of the purpose was to thwart any designs GrandMet might have on either LVMH or Guinness. Thus do yesterday's solutions become today's humdinger of a problem.

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