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STOCK MARKET WEEK: Allied Domecq searches for a tonic to improve its dismal performance

Derek Pain
Monday 11 November 1996 00:02 GMT
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Shares of Allied Domecq have the dubious distinction of turning in the weakest performance of any of the drink giants. The group could be accused of staggering from one mishap to another, often outmanoeuvred by its major rivals.

The Teacher's Scotch whisky to Beefeater gin group is due to roll out results tomorrow. If they are not disappointing the stock market will be suspicious. It is, however, the accompanying trading statement and any hint new chairman Sir Christopher Hogg gives about Allied's future direction which will capture most attention.

Allied, created in the late 1950s when three leading breweries indulged in a defensive merger to challenge the activities of a Canadian takeover marauder, is in the process, Whitehall permitting, of retiring from the beerage by selling its struggling Carlsberg Tetley arm, still the third- largest brewer in the country.

The group, it could be argued, has squandered its once- proud brewing heritage and must now rely on its retailing and spirit operations.

It had been hoped that Sir Christopher would take the view that international spirit brands, a sprawling and diverse chain of pubs, the Dunkin' Donuts outlets, Baskin Robbins ice cream and the Victoria Wine off-licences are not an obvious mix.

If Hanson and Thorn EMI can split disparate businesses, why not Allied? It could join the demerger trend by dividing itself into two stand-alone companies - retailing and spirit production and distribution. Although it became clear at the weekend that Sir Christopher has rejected the demerger idea, there is no doubt many in the market will continue to press for the group to do the splits.

Such a move would make undoubted sense, probably allowing both operations to adopt a more focused approach. It would also offer a fresh start, perhaps giving Allied the opportunity to throw off the impression that it is an accident-prone group.

Its catalogue of woes include a pounds 147m loss in a foreign exchange fiasco, splashing out around pounds 700m for the Pedro Domecq brandy and sherry business just before its major market, Mexico, went in sharp decline, and selling off its food division at mostly disappointing prices. It could also be argued it mistimed its departure from brewing. If it had followed the Greenalls example and quit before the Beer Orders were enforced, it would have avoided having to sell pubs at bottom-of-the-barrel prices during the recession.

There is a feeling the market has not fully appreciated the belated retreat from brewing. It will, sooner or later, free Allied from what is regarded as an onerous price agreement with Carlsberg Tetley and allow the chain to buy pubs - perhaps mounting a bid for a high-profile retailer.

Ironically, Sir Christopher is no stranger to the demerger art. He managed it at Courtaulds, splitting the group into chemical and textile operations.

The two Courtaulds companies have survived as independents. There is, however, a strong belief that Allied's spirits side would quickly fall victim to a takeover bid, probably from Guinness, although Grand Metropolitan could be interested.

Peter Lucas and Nick Williamson at Credit Lyonnais Laing believe Allied's break-up value is around 550p a share against 484.5p on Friday.

Allied is clearly in the last chance saloon. If its performance does not improve it is likely to fall victim to a takeover bid; possibly a break-up exercise. Tomorrow's yearly profits are expected to come out at pounds 560m, before the ravages of exceptional costs. Last year the group produced pounds 645m.

British Steel is another facing a setback. Its interim profits, due today, are likely to reflect the fall in stainless steel prices. Around pounds 250m against pounds 550m is expected. But, here again, figures may be overshadowed. Hopes are running high the group could indulge in a share buyback or, in view of the Government's tax clampdown, a special dividend. British Steel has had a rather dull market existence since it was privatised at 125p a share eight years ago.

Two insurance giants are likely to maintain the lower profits theme. General Accident and Commercial Union are expected to be the casualties of poor underwriting results. Nine-month figures from General Accident should emerge at around pounds 310m (pounds 350m) and Commercial Union should produce pounds 345m, down from pounds 383m.

BT, with second-quarter profits, is another in retreat. About pounds 680m is the guess against pounds 732m last time. The telephone giant is another where mere figures are overshadowed; in its case by the giant merger with MCI, the US group. Since scoring an early gain on the deal its shares have given ground as it has come under pressure in some quarters over the merits of such an ambitious and costly jump into a highly competitive market.

Societe Generale Strauss Turnbull is a voice raised in support of BT. Analysts John Tysoe and Andrew Moffat say: "The merger shifts the company's focus away from the narrow restrictions of the UK market on to the world stage at a time when the market is embracing the concept of competition for the first time. There is a huge opportunity in the domestic USA as that market prepares for full competition."

BAA, the airports group, flies in with interim figures today. A modest advance to pounds 303m is forecast by NatWest Securities. Still, with its regulatory pricing regime settled for the next five years, a relatively low political risk factor and an increasing flow of income from unregulated operations, it should have an encouraging future.

The group's more aggressive approach was illustrated by its unsuccessful bid for the duty-free operations of Allders, the department store chain. It was outpriced by Swissair. There are suggestions it could become more involved with Alpha Airports, where Harrods chief Mohamed Al Fayed last week picked up the 25 per cent interest Granada inherited from Forte and put up for sale.

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