Drinks deals aim to keep Diageo in check as sales growth slows

Ever since Diageo became head barman by pulling off the acquisition of Seagram jointly with Pernod Ricard in 2001, the question has been when, not if, its UK rival, Allied Domecq, would join the party.

Ever since Diageo became head barman by pulling off the acquisition of Seagram jointly with Pernod Ricard in 2001, the question has been when, not if, its UK rival, Allied Domecq, would join the party.

With just one brand - Ballantine's whisky - in the global top 10 by retail value, Allied has long been under pressure to enhance its own drinks cabinet. Indeed, Philip Bowman, the chief executive, has never made any secret of his determination to be part of the continuing consolidation of the drinks industry.

But as the only one of the four biggest drinks companies after Diageo not to be burdened by a significant family shareholding, analysts have long regarded Allied as prey as well as hunter.

For Pernod, Allied holds two main attractions: it will allow the French company to fill some gaping holes in its portfolio, and it will provide some critical distribution clout, particularly in the US. Alistair Smith, who runs the industry research house IWSR, says: "Diageo's sheer scale has given them a clear competitive advantage in key markets, in terms of gaining access to distribution." The bigger a company is, the better its access to distributors, retailers and, ultimately, consumers.

As Nikolaas Faes, at Exane BNP Paribas, put it: "You need only one sales force in any one area and it barely matters how many products those salesmen pull out of their briefcases. As soon as you merge any two companies, cost savings will come from making one of their sales forces redundant."

Analysts estimate that consolidating two distribution networks could save Pernod between 3 and 6 per cent of combined net sales. Buying Allied will also propel Patrick Ricard, the chairman and chief executive of Pernod Ricard, towards his goal of being the world's No 1.

Mr Smith said: "All groups have to benchmark themselves against the industry leader, Diageo. Up until now Diageo has been far and away the dominant group, with lead brands in virtually every major drinks' category outside champagne, cognac and tequila. This possible takeover would push Pernod a long way towards their goal, helping them fill key portfolio gaps, bolstering their market share in categories with low market share, and giving them strength in key countries and regions."

Analysts note that as spirits sales fall back, many drinks companies regard merger and acquisition as the quickest way to buy growth and boost shareholder returns. Nigel Popham, of Teather & Greenwood, says: "Apart from Diageo, there are lots of medium-sized drinks companies with a mixed bag of brands whose prospects are somewhat unexciting. The problem is that the overall market is very mature, which is driving consolidation."

Drinks companies thought they had struck gold when they concocted bottled cocktails such as Smirnoff Ice. Sales of the products initially soared. But even the most popular brands were quickly drowned out by the slew of competitors that flooded the market. This left industry executives to fall back on what the chief executive of Diageo, Paul Walsh, has dubbed "premiumisation" - persuading drinkers to swap local moonshine for the likes of Johnnie Walker whisky and Captain Morgan rum.

The other tactic employed by the industry is one that is fast becoming a commonplace among fast-moving consumer goods companies. Just as Unilever and Procter & Gamble have axed acres of tail brands to focus on so-called global power brands, so have the drinks companies. This allows them to direct their marketing spend behind fewer brands, getting more bang for their buck, to adopt advertising parlance.

Pernod may have done well out of the Seagram deal, swallowing brands such as Martell brandy and Chivas Regal. It has enjoyed particular success with pushing Martell in Asia, the fastest-growing spirits market in the world. But Mr Ricard, whose family controls about 13 per cent of the company that was created in 1975 when the two pastis makers merged, always knew that Seagram alone would not quench his thirst. His problem, when it came to other potential targets, was that substantial family shareholders meant that the likes of Bacardi-Martini and Brown-Forman were unlikely to play ball - at least not in the short term.

A historic shareholder vote at Bacardi may have paved the way for the rum maker to seek a stock market listing by agreeing to create two classes of company stock - one for family members and one for the public - but there was never any suggestion that the family would give up control. And the situation at Brown-Forman is pretty similar. Although the company behind Jack Daniel's is at least a public company, its future is in the hands of the founding Brown family, which owns more than 70 per cent of its voting shares.

By teaming up with Fortune Brands, Mr Ricard can more than double his firepower while gaining a useful shopping partner to help him escape any anti-trust issues.

Although Fortune - perhaps better known as the old tobacco group American Brands - was giving nothing away yesterday as to what had tickled its interest in Allied, the fact that its drinks cabinet holds only bourbon gives it scope for manoeuvre. (Fortune's biggest brand isn't even alcoholic. In fact, it isn't even alcohol but a faucet - that's tap, in English - maker: Moen. It also owns the best-selling golf ball brand, Titleist, and Master Lock, the world's biggest padlock maker).

The question is whether Fortune wants to use a joint takeover of Allied to boost its bourbon selection, by getting its hands on Maker's Mark; expand its wine cabinet, at present limited to three American wineries; or build up a drinks portfolio worthy of the likes of Pernod Ricard.