Business View: I see your two gin brands and raise you a champagne

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The Independent Online

Forget internet poker. A much more exciting game, for higher stakes and with far more intrigue, is Domecq poker. Never mind glamorous celebrities, former porn merchants and mathematical whizz-kids with carefully pronounced surnames. Here you have the cream of the world's wine and spirits industry, a couple of venture capitalists and almost every investment bank in London, playing an £8bn game of chicken where the prizes include some of the best champagne, gin, whisky and rum brands in the world.

Forget internet poker. A much more exciting game, for higher stakes and with far more intrigue, is Domecq poker. Never mind glamorous celebrities, former porn merchants and mathematical whizz-kids with carefully pronounced surnames. Here you have the cream of the world's wine and spirits industry, a couple of venture capitalists and almost every investment bank in London, playing an £8bn game of chicken where the prizes include some of the best champagne, gin, whisky and rum brands in the world.

The story so far is that earlier this year the French drinks giant Pernod Ricard made a bid approach for Allied Domecq - owner of Beefeater gin, Ballantine's and Canadian Club whisky, Mumm and Perrier Jouët champagne and distributor of Stolichnaya vodka. After a few weeks of talks, Allied agreed to sell in a cash and shares deal, which is worth about £7.5bn today.

Everybody and their cat in the drinks industry poured over this offer to see if they could beat it. But only one group said that they might be able to mount a rival bid. That was Constellation Brands, the US wine grower, which put together an alliance with Brown-Forman, distiller of Jack Daniel's whiskey, and two venture capital groups, Blackstone and Lion Capital.

Does this seem as complex as a game of seven-card stud, played on a bashed-up PC with and unreliable broadband connection? Well, it gets worse.

The dealer in this game - the Takeover Panel - started to get anxious about the time taken for Constellation to place its bets on the table, and gave the consortium a deadline to put up or shut up. Though this is still more than three weeks away, beads of sweat are appearing on everyone's brow.

Constellation has managed to get bankers, including Citigroup, Merrill Lynch and Bank of America, to commit something like £5bn of borrowings to a potential all-cash offer of £7.7bn for Allied. Meanwhile, Pernod has been talking to its bankers to get more finance, which would enable it to trump any rival bid. And Diageo, the biggest drinks company in the world, has let it be known to both potential bidders that it can offer about £1bn of extra finance in exchange for picking off one or two key brands (with the champagnes high on its list). Diageo can't bid itself because it has more antitrust conflicts that you could shake a pearl-handled .45 at.

So where to from here?

Constellation might bid tomorrow, but I doubt it. For a start, the wild swings in the dollar/euro exchange rates, thanks to these referendums in France and the Netherlands, are making life interesting for its financiers, who would like to get a decent idea of what their ultimate bid will cost them before they put it on the table. And for another thing, if you have three weeks to make Pernod sweat, why not use it?

One school of thought says Pernod should just up its bid to make Constellation fold. This would be stupid. It has to hold firm until Constellation shows its hand. Constellation's consortium might fall apart. Its offer might be disappointing. Or worse, it could be so good that Pernod cannot live with it. For Pernod to bid against itself would be crazy.

But not as crazy as either side letting Diageo into the game. Diageo is both a spoiler and a cherry picker. It is the school bully that head teacher has banned from games because it roughs up the opposition. If Constellation lets Diageo on board, it will find Diageo muscling its way into getting the most attractive bits of Allied that it is allowed to have, leaving the others with the scraps. If Pernod gets into bed with Diageo, it will find its new partner doing everything it can to destabilise Pernod for fear of creating a force in wine and spirits to rival it.

When all the cards are on the table, I'd bet that Pernod will win this one because it wants Allied more than Constellation does. Its bid is motivated by ego and a desire to create a national champion for France. That is Pernod's ace in the hole.

j.nisse@independent.co.uk

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