Drinks giants spurn Arnault's merger plan

Grand Metropolitan and Guinness are determined to forge ahead with their pounds 23bn merger despite protests by LVMH, the French luxury goods group which is the largest shareholder in both the UK drinks groups.

GrandMet and Guinness are set to reject proposals by Bernard Arnault, LVMH's chairman, to merge its champagne and cognac subsidiary, Moet Hennessy, with IDV and United Distillers, the spirits businesses of GrandMet and Guinness respectively. They will terminate talks with Mr Arnault unless he is willing to put forward other proposals.

"This three-way merger does not give us value for our shareholders. We do not need a deal. We have our deal and it is up to LVMH to provide an alternative which provides greater value for our shareholders. We are not merging for the sake of empire building. We are doing it for the good of our shareholders," a GrandMet spokesman said yesterday.

LVMH, however, is determined to push for a three-way merger and plans to lobby GrandMet and Guinness' other shareholders for support to block a straight merger between the UK food and drinks groups.

"Shareholders in GrandMet and Guinness should be insulted that they have not given this proposal more consideration as it clearly gives more shareholder value. It doesn't take much to realise we can get extra cost savings out of this," an LVMH spokesman said.

In a letter sent yesterday to George Bull and Tony Greener, chairman of GrandMet and Guinness respectively, Mr Arnault outlined plans to create a joint spirits business which analysts believe could be worth up to pounds 15bn.

Mr Arnault wants a 35 per cent share in the combined business in exchange for LVMH's 66 per cent share in Moet Hennessy and its shareholdings in GrandMet and Guinness of 6.4 per cent and 14.2 per cent respectively. Under his proposal the combined group would be floated on the London and Paris stock exchanges. GrandMet and Guinness would then demerge their food and brewing interests, which include Burger King and Guinness Brewers.

A three-way spirits merger would bring cost savings of around pounds 60m, over and above the pounds 175m Guinness and GrandMet have estimated they would save from a merger.

However most analysts believe Mr Arnault's demands are too high.

"We are back to square one. Mr Arnault's calls for a 35 per cent stake are too much. There is not much extra value to be had in demerging the GrandMet and Guinness businesses. And a deal giving a 35 per cent control of a merged spirits business would destroy shareholder value, outweighing any extra cost savings," said Mark Puleikis, drinks analyst at Merrill Lynch.

"Arnault is injecting assets worth around pounds 2.4bn into a three-way merger, which represents just 10 times the earnings he will receive. He is paying about two-thirds of what he should be paying for this stake," said Robert Cumming, UBS drinks analyst.

LVMH has hinted that it was willing to accept a lower stake in the combined spirits business and believes this was likely to be the first stage in protracted negotiations.

But Guinness and GrandMet are unwilling to consider a break up. Indeed GrandMet considered a demerger last year but ruled it out on the grounds that there was too little shareholder value to be gained.

The three-way spirits merger was first outlined in a crunch meeting between the three parties in Paris several weeks ago and Guinness and GrandMet believe the formal proposals offer nothing new. "We have looked at these proposals and there has been no Damascan Conversion. We are nowhere near an agreement," a GrandMet spokesman said yesterday.

LVMH has also outlined an alternative deal to swap its 66 per cent stake in the Hennessy cognac business for Guinness' 34 per cent stake in the Moet champagne operation in a meeting in Mr Arnault's private jet at RAF Northolt in Middlesex last week. However GrandMet and Guinness have also moved to reject this deal.

But the battle is far from over. Mr Arnault will not give up without a fight, and the flamboyant French entrepreneur is no stranger to controversy. He only won control of LVMH in the late 1980s after a bitter boardroom coup, and his business dealings show a streak of ruthlessness and a desire not to settle for second best. "He is a shrewd and ruthless negotiator that should never be underestimated. I certainly would not trust him," said one analyst.

Mr Arnault's aggressive tactics have rocked the normally staid French corporate world, never more so than his recent attempt to take over wine producer Chateau d'Yquem, where he had teamed up with the disenchanted members of the Lur Saluce family to force through a deal. GrandMet and Guinness may still have a fight on their hands.