Guinness merger stalled by twin investigations

Europe and United States competition authorities launch full-scale inquiries into pounds 23bn alliance with GrandMet

The pounds 23bn merger between GrandMet and Guinness faces a four-month investigation by Brussels after the European Commission announced yesterday that the deal would be subjected to a full-scale inquiry. This will delay the formation of GMG Brands until at least the end of October.

The deal must overcome another hurdle after the Federal Trade Commission, the American competition authority, also ordered a full review of the merger yesterday.

Commenting on the decisions, a GrandMet spokesman said: "It would have been extra-ordinary if the competition authorities hadn't looked at the merger given its size. But we are confident we will not have to give up any brands to satisfy them."

The US authorities had been expected to examine the merger closely as Guinness and GrandMet would have an estimated 75 per cent market share of the Scotch whisky market in America and a significant market share of the overall whisky and vodka markets. Canadian drinks giant Seagram has been lobbying the US competition authorities to veto the deal in the US.

The American competition yesterday authorities asked Guinness and GrandMet for further details about the merger. The EC referral had been expected due to the size of the merger and the concerns that the merged group will have a monopoly over spirit sales in continental Europe.

The news comes at the end of a bad week for the merger. Bernard Arnault head of French luxury goods group LVMH Moet Hennessy Louis Vuitton, Guinness largest shareholder, has launched a blistering attack on the proposals. The row has culminated in LVMH mounting a raid on GrandMet's stock, acquiring 6.3 per cent of the group.

It is all a far cry from May 12 when Tony Greener, chairman of Guinness and George Bull, his counterpart at GrandMet triumphantly announced one of the biggest mergers ever seen on British soil to the world's media. Then they chose to dismiss the potential pitfalls ahead. But over the following weeks their euphoria has been dampened by Bernard Arnault who seems hell-bent on doing everything possible to destroy Mr Bull and Mr Greener's dream. First he claimed the merger gave LVHM a right to buy out Guinness' 34 per cent stake in their drinks joint venture Moet Hennessy by invoking a change of ownership clause. Guinness faces the prospect of a lengthy French court battle to determine the fate of Moet Hennessy. At stake could also be the lucrative worldwide drinks distribution contracts, without which the merger could flounder.

Then this week Mr Arnault stunned GrandMet by paying more than pounds 800m for a 6.3 per cent stake in the group in an attempt to force Guinness and GrandMet to spin off their spirits divisions with that of LVMH. The dramatic move shows just how far Mr Arnault is willing to go to get his own way. Mr Greener and Mr Bull know now that they have a fight on their hands. Arnault's bold move is, of course, a huge gamble. He is effectively risking his own shareholders money to increase his influence at the negotiating table. That said LVMH is in a comfortable financial position and has ample funds at its disposal. Its French bankers are believed to be willing to lend Arnault up to pounds 3bn to carry on buying shares.

Mr Arnault's threat should not be taken lightly. He has earned a reputation as a tenacious operator. One example is the way he seized control at LVMH. Mr Arnault first became involved with Moet Hennessy after he took over struggling French textile empire Boussac. Among the collection of ragbag businesses he acquired was Christian Dior, the famous fashion house, which had fallen on hard times. The Dior name had already been sold to Moet Hennessy. Mr Arnault wanted it back but Moet's chairman Alain Chevalier refused to sell. The combative Mr Arnault did not have to wait long to enact his revenge.

In 1987 luxury luggage retailer Louis Vuitton teamed up with Moet Hennessy. Louis Vuitton was run by Henry Racemeir, a former steel executive who had married into the Vuitton family. But he clashed with Moet Hennessy chairman Alain Chevalier about group strategy. Racemeir invited Arnault, a former friend, to take a friendly stake in LVMH to help consolidate his position. But Mr Arnault had other ideas. He shocked the French financial community by launching a boardroom coup. Mr Arnault, ironically with the help of Guinness, then a large shareholder in LVMH, managed to acquire a controlling interest in LVMH. A bitter power struggle ensued, which Arnault eventually won after a protracted legal battle. Since then he has built LVMH into a pounds 13bn empire encompassing fashion labels such as Givenchy,

Mr Arnault will continue to buy shares in GrandMet, hoping to force GrandMet and Guinness to agree to his demands or at the very least reach some sort of financial settlement. He will have to handle the negotiations with finesse. If his demands are too onerous then GrandMet may walk away from Guinness. Rival drinks groups such as Allied Domecq would be only too pleased to have the chance to woo GrandMet. But so far Arnault's assault on the merger has achieved its desired effect and outwitted Guinness and GrandMet. As one industry source close to GrandMet said: "We just can't figure out what he will do next. Whatever Mr Arnault has up his sleeve it is clear he will not give up without a fight.''

Officially both sides have reached an impasse. Mr Arnault has no intention of speaking to Guinness or GrandMet and they do not see why they should speak to Arnault. But Guinness is likely to come under increasing pressure to talk to him. In recent years some of its institutional shareholders have become disgruntled with its poor share price performance. Indeed many in the city speculate that these same shareholders forced Guinness into talks with GrandMet after it aborted a takeover approach for its larger rival last year.

Comment, page 25

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