Guinness and GrandMet 'will have to sell brands'

Competition lawyers see trouble ahead for the pounds 24bn merger.
Competition lawyers warned yesterday that the pounds 24bn merger between Guinness and Grand Metropolitan was highly unlikely to be approved by regulators unless the two companies agreed to significant divestments.

They believe the enlarged group, GMG Brands, will be forced to sell leading brands in certain markets, particularly in the US. They dismissed the Guinness and GrandMet view that no disposals would be necessary as mere "bravado".

"Most companies go into a merger expressing confidence because if they say they are prepared to make divestments then the authorities will probably ask them to make even more," said David Aitman, head of competition law at Denton Hall. "I think they will probably get it through but not without pain."

Competition lawyers have identified two main obstacles that could disrupt the merger. The first is how the competition authorities choose to define the markets in which Guinness and GrandMet compete. The second issue is the combined advertising spend of the two companies, which could act as a barrier to entry to rivals.

On market definition, Guinness and GrandMet have been keen to use the broadest possible measures to make their combined share appear relatively small. They say they have less than 5 per cent of the global spirits market. On a slightly broader definition, which strips out locally produced "hooch", they claim 10 per cent of the "accessible" spirits market.

However, precedents suggest that the European Commission could judge the merger on GMG Brands' share of particular spirits sectors in specific member states.

For example, in the pounds 4.4bn merger of Kimberley-Clark and Scott Paper in 1995, the EC made it a condition of approval that the enlarged company sold certain brands because its share of the toilet tissue, kitchen towels and handkerchief markets would have ranged from 50 to 75 per cent.

GMG Brands would have more than 50 per cent of the UK Scotch market and huge market shares in other spirits sectors in Spain and Belgium. "I would have thought there was a strong possibility that they [the EC] would look at the merger on a member state basis," said Mr Aitman.

Simon Polito, EC and competition partner at Lovell White Durrant, feels divestments might have to be made in the US, where GMG Brands will have around 75 per cent of the standard Scotch market with brands such as Dewar's, Johnnie Walker and J&B Rare. He said the US authorities such as the Federal Trade Commission and the Department of Justice adopt a stricter analysis of market share concentrations than the EC.

The Guinness argument that Scotch, gin and vodka are not separate markets but all part of a broader spirits market in which the companies compete, is also discounted by lawyers. They point to precedents such as the pounds 1.6bn Nestle-Perrier merger in 1992. In that case the two companies argued that they were competing not just in the mineral water market but in the broader arena of soft drinks. The EC rejected the plea.

Asked yesterday whether these cases did not bode ill for GMG Brands, Tony Greener, chairman of Guinness said. "We obviously don't think so or we wouldn't be doing what we are doing."

However he declined to discuss individual markets. He also denied that the combined advertising spend of the two companies might represent a problem. Last year Guinness spent pounds 597m on advertising and marketing, of which pounds 332m was in the United Distillers spirits division. GrandMet spent a total of pounds 1.2bn of which pounds 427m was on its IDV spirits brands.