The new company, GMG Brands, will be the world leader in Scotch, vodka and gin with a list of brands that includes Grand Met's Smirnoff vodka, J&B whisky, and Bailey's as well as the Guinness-owned Johnnie Walker and Gordon's gin.
The company said there were no plans to spin off or demerge the non-spirits interests which include Guinness Brewing Worldwide, producer of the famous stout, or GrandMet's Pillsbury and Burger King interests.
The deal, the largest pure merger in UK corporate history, is expected to provoke a wave of consolidation in the spirits industry which has been plagued by over-capacity, declining sales and a tough pricing environment. Ron Littleboy at Nomura Securities said: "This is the big bang for the spirits industry. All the others will be worried sick." He said the forming of GMG Brands would put pressure on other competitors, particularly Allied Domecq, the Teacher's and Ballantine's whisky group which has seen its market share come under pressure. It will also place pressure on smaller spirits groups.
"It presents a tremendously difficult problem for Allied," said Philip Hawkins, analyst at Merrill Lynch. "It will have to look for strategic partners." Allied Domecq, which reports results today, declined to comment. However, analysts suggested Allied may now seek a link with Seagram, the Canadian group which has several leading brands that include Chivas Regal and Mumm's champagne. Other possibilities mentioned included a bid from American Brands or Brown Forman, another US group.
They further suggested that it was possible that Seagram may move to mount a counter takeover bid for Guinness.
Seagram launched a strong offensive against the proposed merger saying it would raise "serious anti-trust issues, in the US, Europe and elsewhere". Robert Matschullat, the company's vice -chairman and chief financial officer said: "The industry is suffering from over-capacity but it is hard for us to imagine a more anti-competitive way of dealing with it that with this deal."
He said the link-up would give GMG Brands more than half of the global scotch business and 75 per cent of the standard scotch market in the US. "I don't know if they think the regulatory authorities are snoozing but if this deal goes through I believe it will only be after a huge amount of scrutiny and only with major divestitures."
He added that Seagram was not considering a major takeover as it would only face the same regulatory difficulties: "We do not feel compelled to do anything."
Jamie Wilson, finance director of Highland Distilleries which owns the Famous Grouse and Highland Park brands of Scotch said: "The question of consolidation is one that everyone will now be asking themselves. but I am reserving my judgement."
The deal was welcomed in the City where shares in both companies soared. Guinness shares closed 86 higher at 602.5p while Grand Met shares finished 76.5p up at 591.5p.
The move surprised many analysts as only last year Guinness dismissed stock market rumours that it was set to launch a takeover of GrandMet. Tony Greener, Guinness chairman, who will be joint chairman of the merged group with Grand Met's chairman, George Bull, said he had rejected that option as it would have destroyed shareholder value.
However, it was Mr Bull who initiated the merger discussions when he invited Mr Greener for dinner at a central London hotel just a month ago. Mr Bull described the deal as a "win-win situation" and said it was born of commercial logic and personal friendship.
Mr Greener said: "This marks an important point in history when it is possible to two big companies to come together without destroying shareholder value for one of the parties."
Grand Met's chief executive, John McGrath, who will be chief executive of GMG Brands, said the deal was logical in the face of spirits industry which was facing declining demand, over-capacity and strong retail customers. He said the two groups were a perfect fit, with few over-lapping brands and complementary geographic strengths.
The deal was opposed by Bernard Arnault of Luis Vuitton Moet Hennessy, the luxury goods group which holds 14.2 per cent of Guinness. He voted against it preferring to spin-off the non-spirits interests into a separate company.
The deal still requires regulatory approval and its size means it will by-pass the UK competition authorities and be ruled upon by the European Commission's merger task force instead. The management said they were confident of approval.
Under the terms of the deal Grand Met shareholders will hold 52.7 per cent of the enlarged group with Guinness shareholders holding the remaining 47.3 per cent. Shareholders will receive a special capital repayment of not less than 60p per share.
Grand Met also announced its interim results yesterday showing profit up just 3.5 per cent in the six months to 31 March to pounds 471m.
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