Hogg misses a golden opportunity at Allied Domecq; The Investment Column

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The Independent Online
Sir Christopher Hogg has missed a golden opportunity to stamp his authority on Allied Domecq, a business crying out for a firm hand on the tiller. The City would have settled for either the clean slate that demerger would have represented or a management clear-out or both, but in the end it was offered only a management-speak palliative (translation: we have done a duff job and now we're trying harder). The shares closed 14p lower at 454p.

Sir Christopher gave a sensible justification for shunning demerger, which he neatly described as the "seductive option" given the weight of investor backing for the idea. It would have cost a fortune in fees, he said, and caused serious tax headaches, especially for the spirits arm which earns most of its profits overseas and would fall short on UK earnings to offset its advance corporation tax liability.

What he didn't say explicitly, but almost certainly believes is that the current management is not up to the dual challenge of steering a steady trading course through turbulent conditions while preparing Allied for the big split. And of course if anyone knows what it takes to break up a large corporation it is Sir Christopher, who did the job with such resounding success at Courtaulds.

What he did say yesterday, but sotto voce in case anyone actually heard, was that he was not prepared to stand up and sell either business to investors as an independent entity. Neither the Ballantines, Teachers and Beefeater spirits business, nor the Big Steak Pubs to Baskin Robbins and Dunkin Donuts retail arm are credible businesses on their own. Quite an indictment, but a refreshingly honest appraisal of the company he has inherited.

Results for the 12 months to August yesterday confirmed the difficulties facing the group. Even stripping out the change of year-end and the one- off costs of finally extricating itself from brewing that distorted the figures in the table, underlying profits were 11 per cent lower than a year previously, hit mainly by a 580,000-case destocking by US wholesalers.

Spirits will continue to struggle against flat volumes around the world with prices moving in line with low inflation at best, and worryingly Allied appears to be coping less well with this trading backdrop than Guinness or GrandMet.

Retailing is well enough run, but it enjoys a less than exciting portfolio of brands including the unmemorable likes of Mr Q's and Wacky Warehouses and is being left standing by the really sharp operators like Whitbread.

On the basis of forecast profits of about pounds 620m, the shares trade on a prospective price/earnings ratio of 12 and offer a dividend yield of more than 6.5 per cent. Given the long uphill slog ahead, that is not a harsh rating and the shares, which have underperformed the market by 40 per cent over the past three years, are no more than fairly priced.