View from City Road: An offer made in the rights spirit from Allied

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The Independent Online
So it's adios Allied-Lyons and bienvenida Allied Domecq. Once again a UK company is tightening its grip on the global drinks market, in this case with a deal that will create the second most powerful grouping in leading spirits brands behind Grand Metropolitan's IDV.

There are three big plus points behind the deal: distribution, brands and finance.

Distribution has been the pivot in turning British companies into the dominant force in spirits. Hiram Walker, the new umbrella for Allied's interest in Domecq, will now, like IDV and Guinness, control more than 90 per cent of its distribution channels.

For spirit brands, where Domecq and Allied together now rival IDV, it will be a two-way process. Allied will, for example, be selling more Ballantine's whisky to the Spaniards and Mexicans, while Domecq's tequila will be heading northwards into the US and east to Europe.

From the financial point of view the deal turns a tax-inefficient, minority-owned set-up into one that is supposed to start enhancing earnings in 1995/96, assuming the new Domecq family minority does not cash in before then.

Allied's claim that it is buying control for a modest 15 times earnings looks a bit cheeky if you allow for debt, a pounds 75m fair value adjustment and a pounds 75m restructuring provision which pushes the multiple up to a stiff 23 times.

But worthwhile cost savings should emerge, as the pounds 75m provision implies, not least from rationalising spirit distillation and Domecq and Harvey facilities in Jerez. The rights offering, priced at a cautious 20 per cent plus discount, rates the shares on a p/e of 12.8 assuming Allied makes pounds 752m of normalised pre-tax profits in 1995/96. As the prospective yield is nearly 5 per cent, shareholders should take up the rights.

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