Jeremy Warner's Outlook: A good deal for Allied, but winner's curse may await Pernod Ricard

Shire chooses the wrong target; Thain acts to modernise the NYSE
Click to follow
The Independent Online

Philip Bowman, chief executive of Allied Domecq, seems to have secured a decent enough price for his company, but there's no disguising the disappointment of having to sell out to the pastis swilling French. In the end he had to be wrestled into signing by his chairman, Sir Gerry Robinson, who could readily understand Mr Bowman's frustration but took the view, probably rightly, that this was not a price they could afford to refuse.

At 670p a share, or £7.4bn in total, this is far higher than the price has ever been before and is more than double what it was just two years ago. For Mr Bowman, the disappointment is rather in that he's being bought by one of his fiercest rivals, where as in his own mind the boot ought to be on the other foot. Unfortunately, it is not possible to buy Pernod Ricard, or indeed any other second tier international drinks concern - even where they are publicly quoted, they tend to be family controlled - whereas it is possible to buy Allied Domecq.

In theory, this should make Allied a highly attractive proposition, capable of commanding a correspondingly large premium for rarity value alone. Rival bids shouldn't altogether be discounted, but in practice it is hard to see who else is in a position to buy. Allied is too large for most of its rivals, which is why Pernod is having to defray part of the costs by selling some of the most treasured Allied brands to Fortune. Competition concerns would meanwhile rule out the only company capable of swallowing Allied whole, Diageo.

As for private equity, there's no one out there capable of achieving the projected €300m of annual cost savings Pernod gets simply by closing Allied's head office and pouring its brands through the Pernod distribution and marketing network. With his acquisition in partnership with Diageo of the Seagram drinks business three years ago, Pernod's Patrick Ricard has demonstrated that he can make these deals work. Then, as now, he took on more debt than many thought sensible to finance the deal, but he made it pay off handsomely and now the debt is largely paid down.

Unusually for a transaction of such size, the Pernod share price has been rising strongly ever since the company's efforts to buy Allied first became known about, this on the theory that the Seagram trick can be repeated with Allied. I wouldn't be so sure, and I'd certainly run a mile from the Pernod paper that is being offered as part consideration.

By British standards, Pernod Ricard has a bizarre capital structure which even for those institutional investors allowed to swap UK index stocks for less well known and understood Continental equivalents, should set alarm bells ringing. Pernod's equity is made up of bearer shares, which in itself is unusual for a British investor, as the owner has to apply to the company to receive his dividend entitlement.

Once registered with the company and held for a minimum of ten years, these bearer shares take on double voting rights. Since few investors hold their shares for that long, the effect is to skew voting rights towards the founding dynasty. The economic interest of M. Ricard's family in Pernod after the dilution of the Allied deal falls to just 9 per cent, but his voting interest is nearly double that. Once friends and supporters are taken into account, the Pernod chairman and chief executive might command as much as 40 per cent of the votes.

This might be considered reasonable if M. Ricard's economic interest were of a similar order of magnitude, but as can readily be seen, he's not exposed to anywhere near that level of risk. A good deal for Allied, perhaps, but whether it's worth investors hanging around long enough to find out if it is also a good deal for Pernod is a lot more questionable.

Shire chooses the wrong target

With a tidy little £700m of net cash burning a hole in the balance sheet, Shire Pharmaceuticals has been priming the stock market to expect acquisitions for some years now. No surprises, then, in the fact of yesterday's agreed takeover. More puzzling was the target. Transkaryotic who?

Matthew Emmens struggled to explain even what the US-based biotech does, let alone why he's buying it. On any measure Transkaryotic Therapies looks expensive, its chief executive has just inexplicably resigned, and it doesn't even have any products licensed in the US, the country Shire is supposedly meant to be targeting.

Indeed, the only obvious rational is that both companies focus on medicines sold to specialist physicians, so neither of them require a large salesforce. That's not much of a reason for slashing out $1.6bn. Mr Emmens was unable to say even what the scope for cost savings would be, but then this is not about cost savings, he's keen to stress. Rather it's about acquiring a promising new pipeline in conjunction with biotech research and development expertise.

Well maybe, but if investors really wanted an exposure to Trans-thing-a-mejig, then they could have gone and bought it a good deal cheaper directly on Nasdaq. From the outside, this looks like one of those rushed, spend the money quick before investors start to ask for it back, transactions. Mr Emmens faces an uphill struggle persuading the City he's doing the right thing. Let's hope he manages to do better than he did yesterday, for there's a $40m break fee to pay if he's forced to retreat, not to mention his own pay-off.

Thain acts to modernise the NYSE

Surreal is a word that hardly describes the experience of visiting the floor of the New York Stock Exchange (NYSE). Apparently ancient telephone technology sits side by side with the latest in on-screen wizardry, and though the buzz and mayhem of the floor, as the traders shout their orders and strut their stuff, is real enough, it feels like and indeed is little more than redundant ritual, preserved only by fast-dying vested interest.

When John Thain, a former chief operating officer of Goldman Sachs, was appointed chief executive 15 months ago, it was partly to clean up the NYSE's act after the excesses of the Dick Grasso years, but it was also to rescue this decaying monument to a bygone age from oblivion by busing it into the 21st century.

After a year of preparation, Mr Thain is finally ready to act. The method chosen, which is to buy the rival electronic exchange Archipelago and announce plans for a simultaneous demutualisation and flotation, will not be to everyone's liking. Indeed it is already being described in some quarters as a Goldman Sachs stitch up. Goldman, Mr Thain's old company, is acting not just for the NYSE, but for also for Archipelago, where it owns a large chunk of the equity. A third party fairness opinion was sought on both sides, but how cosy is that?

Still, by expanding the NYSE's electronic trading capacity, taking the exchange into derivatives, and allowing longer trading hours, the deal seems as far as one can tell to stand on its merits. The NYSE only continues to occupy the position it does in US capital markets because it is ringed around with monopolistic protections. These have managed to survive much longer than anyone would have thought remotely possible, but in recent years there have been growing signs of strain.

Mr Thain's insistence that demutualisation does not mean the end of the trading floor is in truth no more than what he had to say to keep the seat holders happy. They all stand to make a small fortune from flotation, but if it also means destroying their livelihoods and way of life, they may not be so keen to vote for it. Maintaining a trading floor in the modern age is a Canute-like business. Mr Thain wants to be remembered as the man who saved the NYSE. To do so, he'll eventually have to surrender the floor as well.