A headlong rush to the bar

Companies are lining up to take on Seagram's range of drinks after its merger with Vivendi was given the go-ahead last week
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The Independent Online

Not since Guinness and Grand Met shocked the City by announcing their intention to merge two-and-a-half years ago has so much speculation and excitement surrounded the worldwide spirits industry.

Not since Guinness and Grand Met shocked the City by announcing their intention to merge two-and-a-half years ago has so much speculation and excitement surrounded the worldwide spirits industry.

The $23.5bn (£16.2bn) merger between France's Vivendi and Canada's Seagram, which was given final clearance by the Canadian authorities to go ahead last week, will create a media and entertainment giant. But it will also usher the disposal of Seagram's coveted spirits portfolio of 250 drinks brands, including such prized assets as Captain Morgan rum and Crown Royal Canadian whisky. Not surprisingly, the lure of these expensive tipples, thought to be worth about $7bn in total, has sparked a rush to the bar reminiscent of the end of prohibition. As one analyst commented: "Opportunities like this don't come up... well, hardly ever."

With the auction process now entering its second stage, the frontrunners have emerged as: the UK's Allied Domecq and Diageo, France's Pernod Ricard, the Bermuda-based Bacardi and Brown-Forman of the US. Diageo, the world's biggest spirits group which is the product of the Guinness and Grand Met marriage, is prevented for competitive reasons from acquiring the whole Seagram portfolio. Accordingly, it has teamed up with Pernod and hopes to cream off top brands such as Captain Morgan as well as some regional labels while preventing its arch rival, Allied, from challenging its leadership position.

Brown-Forman and the privately-held Bacardi have also formed an alliance, hoping to boost their chances of winning by pooling their more limited firepower. That leaves only Allied Domecq to brave the contest alone.

But there is one more party in the equation, the so-called "kingmaker" of the piece, which could decide the fate of all its bigger rivals. While Allied and the rest are busy courting the favour of Seagram and Vivendi's boards, they are also using their persuasive powers to try to tempt Vin & Sprit, the Swedish state-owned company which owns the Absolut vodka brand, to lend its support to their bid.

The contract to distribute Absolut in the US is seen as one of Seagram's most valuable assets. It has a face value of about $300,000 to $400,000, but offers the potential to be worth as much as $2bn if the new owner could negotiate full control of the brand. V&S has the right to withdraw from its agreement with Seagram in the event of a change of ownership, but has offered itself as a potential partner to the bidders, hoping in the process to accelerate its own ambitious expansion plans.

Early indications are that the Stockholm-based group has aligned itself with Bacardi and Brown-Forman. It is understood that the companies together attended a presentation, part of the due diligence process, with Seagram's management last week. But analysts say it is unlikely that the three-way union, or any of the patnerships for that matter, is set in stone.

Alan Gray, an analyst at ING Charterhouse, said: "I think there will be quite a lot of jockeying... There is little doubt that Diageo and Pernod will proceed together, but you couldn't rule out Vin & Sprit deciding to go with them... There is a very good chance that Allied will bring someone else on board, possibly Vin & Sprit or a financial backer... Bacardi and Brown-Forman might completely split or metamorphose into something else."

Allied is the only bidder that has not yet signed a confidentiality agreement with Morgan Stanley, Seagram's financial adviser, which is handling the sale. This has sparked speculation that the group is on the look-out for a partner, despite its insistence that it does not need any help in raising the financing to fund its offer. Nigel Davies, an analyst at Chase Fleming, said: "Allied doesn't want to get together with a formal partner yet. It wants to have a bit of flexibility."

Analysts believe the group could afford to pay as much as $9bn if the bidding hots up, but only if it divests a package of secondary drinks labels and non-drinks businesses such as Dunkin' Donuts and Baskin Robbins ice cream.

Diageo and Pernod are seen as the strongest financial hitters, but most of the muscle comes from Diageo's side of the fence, while Pernod is thought to want to take the rump of the Seagram assets to achieve its five-year plan of doubling in size by making a single acquisition.

Mr Davies believes the financial health of the bidders could become even more important if current market trends persist. He said: "The weakness of the euro could push up the relative dollar price of the acquisition, which might be a cause for concern."

Another potential spanner in the works is that V&S could pull out of the process completely. According to local press reports, opposition Swedish MPs have been calling for the company to be privatised so the money tied up in it can be returned directly to tax payers. Although this would not affect Diageo, which could not buy Absolut anyway because it already owns the Smirnoff vodka brand, it could dampen the enthusiasm of the remaining bidders, who would be left to squabble over the remaining assets.

Whatever happens, few expect that the auction will result in a single, clean sale. Analysts predict that the repercussions of the process will rumble on for months, creating a knock-on flurry of consolidation deals among the drinks sector's smaller players.

Rémy Cointreau, LVMH and Fortune Brands are all said to be on the sidelines, waiting to be fed a tit-bit if whoever wins the Seagram prize announces some back-to-back disposals.

The bidders are due to submit their final offers by mid-November. It is expected that a preferred suitor will emerge by the end of December and the deal is pencilled in for completion by February next year.

As things stand, the field looks wide open, with analysts refusing to predict who will emerge as the ultimate victor. Summing up the companies' prospects, ING Charterhouse's Alan Gray said: "Diageo's balance sheet is the strongest. The company that needs [the deal] most is Allied. But you can't rule out Bacardi and Brown-Forman given the scale of their ambition to get bigger."