Guinness marriage won't boost sales

outlook On Raising Interest Rates, The Drinks Giants' Merger And Financing The High-Speed Rail Link
When Guinness and Grand Metropolitan first announced their marriage last May, the competition obstacles and other potential difficulties with the merger looked almost too great to be surmountable. If the competition authorities in either Brussels or the US didn't get them, then Bernard Arnault, Guinness's troublesome minority shareholder, certainly would, was the general view. As it is, the couple looks like jumping all of these potential roadblocks with surprisingly little damage to the fabric of the relationship.

Brussels and Mr Arnault have already been satisfied, leaving just the US Trade Commission standing in the way. So confident are directors of shifting this one too that in anticipation they've now arranged the date of the shareholders' vote (26 November) so that the whole thing can be approved by the High Court before the turn of the year. Both Guinness and GrandMet are hopeful that the price extracted by the US Trade Commission by way of divestment will not exceed 5 per cent of their combined profits, the level at which the rules would require them to go back to shareholders for fresh approvals.

While this would actually be quite a lot, it would not be a deal breaker. Actually the divestment required is likely to be a good deal lower. Since Diageo is already being asked to divest Dewar's in Europe, it would plainly be a neat solution to the problem if that were the brand chosen for cull by the US authorities too. Analysts reckon that if the brand were disposed of lock, stock and barrel, it could fetch some pounds 500m, more than enough to cover the extra capital repayment Guinness and GrandMet announced yesterday.

So a happy ending after all. But will the couple live happily ever after? This is a merger driven primarily by its potential for cost-cutting. Nearly pounds 200m annually will be cut from the cost base on the liquor side of the group, it is reckoned. More doubtful is the claim that the complementary brand portfolios and distribution networks of the two companies will succeed in greatly enhancing sales. Claims like this have been made before for drinks mergers, notably by Ernest Saunders when in short order he acquired first Bells and then Distillers. Certainly Guinness later succeeded in putting up prices by quite a lot, but it did not succeed in selling significantly more Scotch.

The same is likely to prove true of this latest act of consolidation in the drinks industry. The benefit will all be to the shareholders in terms of lower costs and higher prices. But will it enhance consumer choice, competition and job prospects? Not a chance of it.

Comments