Diageo demonstrates Absolut conviction

Diageo, the maker of Smirnoff vodka and Guinness, is expected to go ahead with a bid for the Absolut vodka owners Vin & Sprit despite worries about competition.

Paul Walsh, the chief executive of Diageo, the world's largest drinks maker, recently expressed an interest in making an approach, while Pernod Ricard and Bacardi have also told the Swedish government that they would be keen on buying the state-owned company. All would like to get their hands on the jewel in Vin & Sprit's crown, the super premium vodka Absolut, which, with its iconic bottle and clever marketing campaign, has rapidly grown into a global success.

Regionally, it is thought Diageo could run into problems in a bid for the company, which has a "conservative" price tag of around £3bn, but analysts indicate there are ways around the thorny issue of competition.

Across its vodka brands, which along with its Smirnoff range includes Tanqueray's Sterling vodka and Ciroc, Diageo takes 25 to 26 per cent of market share in the US, while Absolut enjoys around 10 per cent. In the UK, Smirnoff dominates with 40 per cent while Absolut takes around 5 per cent.

Melissa Earlam, an analyst at UBS, said that a potential acquisition by Diageo depends on how the US regulators decide to define the market. "It is very difficult to second guess," she said. If the vodka market was split into separate categories such as premium and super premium, an acquisition could be a possibility, she said. But if the vodka market was taken as an aggregate, there could be an anti-trust issue.

Absolut sits firmly in the super premium market, retailing at around $20 a bottle in the US, while Smirnoff Red, Blue and Black sell for around $12.99. Ms Earlam added that if the regulators deemed the market share was excessive, Diageo could potentially use a separate distributor in that region.

Globally, Smirnoff is the world leader with 5 per cent of the vodka market, followed by Nemiroff, a Ukrainian standard vodka with 2.3 per cent. Absolut takes third place with 2 per cent.

The Swedish government presented plans two weeks ago to sell Vin & Sprit as part of its wider privatisation of national industries. The American company Fortune Brands, the maker of Jim Beam and Sauza, has also been tipped as a potential bidder for V&S due to a joint distribution deal it already has with the company.