Guinness acts to foil Arnault assault

Bernard Arnault was last night having to rethink his strategy to block the pounds 23bn merger between Guinness and Grand Metropolitan, as the two UK drinks companies threatened to make a radical change to the terms of the deal.

Guinness and Grand Metropolitan said that they were prepared to raise the level of shareholder support needed to block the deal to 50 per cent, even though they would face an extra tax bill of up to pounds 70m. Mr Arnault, who heads the LVMH luxury goods group in France, has busily been increasing his stake in GrandMet and lobbying for support from institutions to muster a blocking vote - which is 25 per cent under the current bid terms.

More than pounds 1bn have been spent by LVMH on building up a 11.06 per cent stake in GrandMet, and Mr Arnault now faces the prospect of having to spend billions more if he sticks with the same tactics.

The potentially fatal blow made against Mr Arnault's campaign yesterday came just 24 hours after the combative Frenchman claimed the merger was dead in the water, and claims that he could muster support from institutional shareholders to reach the 25 per cent blocking target. Analysts said it Mr Arnault would struggle to command more than 50 per cent of the vote.

Philip Yea, Guinness' finance director, said: "If we find a rock in the road we can drive around it. We have made sure we have done our homework and we have contingencies in hand to deal with Mr Arnault. An extra pounds 70m of stamp duty is a drop in the ocean compared to what we can gain from a merger of GrandMet and Guinness." Anthony Greener, chairman of Guinness, added: "This deal will go through. It will create pounds 4bn of extra value for our shareholders."

However, LVMH claimed that it could still scupper the deal. "We believe we can stop the deal with 25 per cent of the vote. It would give us the power to prevent the transfer of assets between GrandMet and Guinness among other things," a spokesman said yesterday.

GrandMet and Guinness yesterday also slammed Mr Arnault's alternative proposals to form a wines and spirits business, incorporating Moet Hennessy, the spirits subsidiary of LVMH, the IDV business of Guinness and the United Distillers arm of Guinness. The plan would involve the demerger of Pilsbury and Burger King, GrandMet's food manufacturing and fast food businesses, and the brewing arm of Guinness.

GrandMet and Guinness vehemently ruled out any imminent demergers, claiming they would destroy pounds 1.5bn of shareholder value. Analysts believe the total demerger bill could easily top pounds 2bn due to the loss of purchasing power economies in the group.

John McGrath, chief executive of GrandMet, said: "These proposals from LVMH will destroy shareholder value, primarily due to the US tax costs of separating these business. No board in their right mind would be prepared to do a deal that would destroy pounds 1.5bn of shareholder value and then have pay a premium for Moet Hennessy."

Mr McGrath accepted that the three way merger of the spirits business would bring extra cost savings of pounds 65m, over and above the pounds 175m that GMG Brands would create. But he denounced Mr Arnault's demands for a 35 per cent stake in a combined spirits group and cast aspersions on LVMH's projections that the spirits group would bring in extra revenue of pounds 65m. "Mr Arnault's proposals involve transferring pounds 130m of shareholder value from GMG shareholders to LVMH shareholders. The revenue benefits that LVMH predict are unrealistic according to our analysis," he said.

A fund manager at one of GrandMet's institutional shareholders said: "Mr Arnault will have to come up with something substantially better than he has put on the table so far to get enough support for his ideas. At the moment, we are clearly siding with the management and I expect most of the other large shareholders are too."

Mr Arnault has indicated he is willing to take a lower stake in a combined spirits group by swapping some of his Moet Hennessy assets and shareholdings in GrandMet and Guinness for a stake in the demerged food and brewing interests. He would also consider a watertight commitment from GMG Brands, the planned new name of the merged Guinness and GrandMet groups, to demerge businesses in the future.

GrandMet and Guinness are willing to push ahead with the merger without Moet Hennessy.

George Bull, GrandMet's chairman, said: "This is a bit like the tail wagging the dog. Moet Hennessy would only increase the size of the spirits portfolio by 3 per cent and the size of the wines and spirits business by 6 per cent. It is tiny relative to the deal we are talking about."