Diageo and Pernod unite in Seagram race

Diageo, the world's biggest spirits company, yesterday said it had chosen France's Pernod Ricard as its partner in the race to acquire the drinks assets being sold as a result of the $34bn (£22.67bn) merger between Canada's Seagram and Vivendi of France.

Diageo, the world's biggest spirits company, yesterday said it had chosen France's Pernod Ricard as its partner in the race to acquire the drinks assets being sold as a result of the $34bn (£22.67bn) merger between Canada's Seagram and Vivendi of France.

In a joint statement, Diageo and Pernod said they had "agreed to work together" to launch an expected cash offer for Seagram's wine and spirits businesses, thought to be worth more than $5bn.

Diageo had earlier held talks about a joint bid with Bacardi, the Bermuda-based company which is the world's fourth-biggest spirits maker. But it is understood that Pernod approached the UK group with more favourable terms for an alliance. A spokesman for Bacardi said: "It is not our policy to comment on any business developments of this kind."

Analysts said the Diageo-Pernod partnership "made sense" for both parties and could prove a serious challenge to Allied Domecq, the number- two spirits group which has already declared its interest in the Seagram assets.

Diageo is spinning off its Burger King restaurants and Pillsbury food business to focus on its drinks interests. Although prevented for competition reasons from launching a full bid for the Seagram unit, it is interested in hiving off the Captain Morgan rum and Crown Royal whisky brands, valued at about $1.4bn. Meanwhile, Pernod could double its size by sweeping up the rest of the portfolio, including Chivas Regal whiskey, Martell cognac and possibly the distribution rights for Absolut vodka, although these may revert to their Swedish owner in the event of a change of control at Seagram.

One analyst said: "The only problem is the financing. For Pernod, it would be like the reverse of giving birth - biting off something bigger than your head." The French group is capitalised at about $3.5bn but would eventually have to stump up as much as $6bn to complete the deal. Richard Burrows, managing director for Pernod, said: "We are in a strong financial position. We are quite confident in our ability to raise the necessary financing to play our part."

The spotlight will now fall on Allied Domecq and Bacardi as the City waits to see how they will respond to yesterday's announcement. Allied was initially seen as the front-runner to succeed in clinching the Seagram deal, despite concerns about how it would fund a bid, because of the close strategic and geographic fit between the two portfolios.

Nigel Davies, an analyst at Robert Fleming Securities, said: "I can't really see Allied standing by and letting Diageo get hold of these assets." He said it was likely that Allied would now look for a partner to strengthen its bid, with the two most obvious candidates seen as Bacardi or Brown-Forman of the US. Other possibilities include LVMH, the luxury goods group, or Rémy Cointreau.

A spokesman for Allied said: "The strength of our position is that we don't need a partner. Partnerships are weak ... We can do it by ourselves." But he added that the group had not completely ruled out an alliance if the terms were sufficiently attractive.

Shares in Allied fell 1.25p to 325p while Diageo ended down 11p at 600p.

Morgan Stanley, which is handling the sale on behalf of Seagram, is due to publish financial details on the business next week.