Whitbread said it was offering pounds 1.5bn in cash and 135 million in shares - a U-turn on its earlier stance that its original offer of 230 million shares was worth more. It is also taking on pounds 25m of Allied Domecq debt.
The Whitbread bid represents an about-face for the group, which last week said it would walk away from any prospect of a competitive auction for the pubs.
Allied Domecq shareholders will be offered the choice of cash and shares in a mix and match election. If cash or shares are oversubscribed they will be dealt out proportionately between the applicants.
Hugh Osmond, chairman of Punch, declared that it was "gloves off time". Hinting that it might bid higher, Punch said Allied should now release information kept to Whitbread under an exclusivity clause.
The Whitbread move puts severe pressure on Allied Domecq directors, already under pressure from Punch to recommend its pounds 2.85bn cash offer, which lapses on Monday.
Whitbread said its offer was conditional on the approval of both Whitbread and Allied shareholders, as well as regulatory clearance from the Office of Fair Trading. Whitbread will convene a second egm within 16 days, after the OFT has reported back.
The OFT has also said it will examine Punch's bid. While Allied Domecq shareholders are indemnified against OFT objections in Punch's bid, the OFT concern may raise issues for Bass. The leisure giant has committed over pounds 1bn to buy pubs from Punch if it wins the auction.
The pounds 2.877bn offer from Whitbread is likely to be its final offer. Yesterday the signs were that institutions were inclined to plump for the Whitbread offer. The share element of the deal gives Allied investors the chance to share in synergies of at least pounds 100m a year. Earlier yesterday, Allied Domecq shareholders were asked to vote on issuing new ordinary shares in the company and changing its name to Allied Domecq Holdings in preparation for the pubs sell-off.
Some shareholders at the meeting expressed concern about the way Allied Domecq and Punch Taverns had telephoned them to ask which offer they favoured. One man said Allied's telephone polling made the group look like "second class double glazing salesmen".
Sir Christopher apologised to those offended by the telephone calls, saying that the board was trying to communicate with shareholders as best it could about both offers.