Outlook: Allied Domecq

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The Independent Online
FOR ANY management team, the arrival on the share register of the legendary investment guru, Warren Buffett, is usually a welcome vote of confidence in their company and its strategy for the future. For one as beleaguered by critics as Allied Domecq, it must be like manna from heaven. Allied's chief executive, Tony Hales, has been under siege for as long as anyone can remember, which in the City is admittedly not terribly long. The only reason he's still there at all, it is unkindly said, is because of the support of his chairman, Sir Christopher Hogg, whose stewardship of Courtaulds in the past and present position as chairman of Reuters has earned him sufficient respect in the City to be given the benefit of the doubt.

Now, finally, their luck seems to be turning. And about time, they might reasonably think. Fate has not dealt them much of a hand. On the drinks side, Allied has some top drawer brands, but it is very much second fiddle to Diageo, while its retail interests are in truth a terrible old rag bag of underinvested names and formats.

To be brutally frank, it is remarkable that the company ever came to Mr Buffett's attention, for it is not obviously the greatest investment since Pepsi-Cola. What's more, Mr Buffett has been here before, building up a large stake in Guinness (now Diageo), before exiting without a profit. Given that his first adventure in the British drinks industry was so unrewarding, why's he coming back for a second bite?

Whatever his reasons, he must already be showing a handsome profit, since his 2.2 per stake would have been built up before the group's deal with Whitbread was announced. We'll have to await details - due today - before deciding whether this is a better deal for Whitbread than it is for Allied, but so far it seems to have been well received by investors.

One obvious drawback is that it threatens to take Allied out of the FTSE 100 share index. Whitbread is planning to buy Allied's retail interests with shares, which will then be distributed pro-rata among Allied investors, leaving Allied as a pure drinks play with a few odds and sods tacked on. This is the demerger that the City has been demanding. The trouble is that on present valuations, the remaining rump drinks company will be on the cusp of the minimum size required for FTSE 100 membership.

Mr Buffett's interest might add the support needed to ensure that Allied stays in. The coincidence of events - the deal with Whitbread and Mr Buffett's new stake - could hardly have been more fortuitous.