Seagram in talks with Allied over spirits merger

Allied Domecq is holding merger talks with Seagram, the Canadian leisure giant, along with some of the world's largest spirits companies. Andrew Yates reports on the group's attempts to form a powerful drinks cocktail and take on the might of the newly merged Guinness and Grand Metropolitan Group.

City observers believe that Allied is most likely to strike a deal with Seagram to create the biggest spirits business in the world with sales of more than pounds 4bn a year. Goldman Sachs, the US investment bank who has been appointed to advise on Allied's options, has placed Seagram at the top of the list of potential partners. However, the group is understood to be holding talks with other big names in the industry including Bacardi- Martini, Pernod-Ricard, Brown-Forman and American Brands to create a world beating drinks Goliath. All these groups have brands that Allied would dearly love to get hold of.

One analyst said: "At this stage you can't exclude any of the big players in the market, although Seagram is an early front-runner. It has the best match of brands with Allied."

Allied has come under pressure to do a deal after Guinness and Grand Met announced its intention to merge last May, to form Diageo.

Goldman Sachs is understood to be pushing Allied to seal a partnership as soon as possible. However, a deal is unlikely to be concluded in the immediate future. Sources suggest Allied is determined not to rush things and has no set timetable for the conclusion of talks. The City would like to see Allied sort out a deal within the next six months as Diageo begins to exert its huge market power.

Allied is the second-biggest spirits group in the world ahead of Seagram, which is number three in the market. A spirits merger would bring together a vast array of brands, including Teachers and Ballantine's whisky, Courvoisier cognac and Beefeater gin from Allied and Seagram's Chivas Regal whisky, Martell cognac and Mumm champagne. At the moment the two groups are planning a complete merger of their spirits businesses, although they could consider just combining distribution networks.

However Seagram and Allied have ruled out a full merger. Seagram's entertainment business which includes Universal Studios in Hollywood sits uneasily with Allied's pub and retail interests which range from the Firkin chain to Dunkin' Donuts. Allied has annual spirit sales of pounds 2.5bn compared with Seagram's pounds 1.6bn, which means Allied would probably take a majority stake in the combined business that could eventually be demerged and floated on the Stock Exchange.

If Allied manages to form a partnership, it is likely to spark another wave of consolidation in the drinks industry.