Allied with Two
The drinks market is set for a huge shake-up after Allied Domecq finally received a merger proposal from long-time suitor Pernod Ricard, with backing from Fortune Brands of the United States.
Following months of secret courting, the companies finally went public regarding their talks over a union that would create a 12 billion pound ($22.7 billion) superpower in the global spirits market.
The plan is to put together an appealing cocktail that would include Beefeater Gin, Courvoisier Brandy and Chivas Regal scotch -- giving the pair the size and scale to rival Diageo, the industry's undisputed number one.
Whether they will be allowed to consummate the relationship is another matter. That decision will ultimately fall to regulators on both sides of the Atlantic.
To ease some of their concerns, Pernod is teaming with Fortune Brands, maker of Jim Beam bourbon and Titleist golf balls.
The American firm is expected to buy up one of the merged company's two brandy labels -- Martell or Courvoisier -- and either Chivas Regal or Ballantine's scotch whisky.
At the rumored asking price, Allied is worth 8.5 billion pounds ($16.1 billion), making it an expensive acquisition. Pernod's investors may well wince when they realize that the British firm is also saddled with 2 billion pounds ($3.8 billion) of debt.
The French company may claw back some of the acquisition costs with a quick sale of the food business -- which includes Dunkin' Donuts -- for as much as 1.7 billion pounds ($3.2 billion).
It could fund its bid by issuing bonds, but it has not ruled out using its own equity to bankroll a deal. Whether big institutional investors would be keen to take the shares is another matter.
Both sides were keen to stress that any deal is still in its early days. It may take up to a month to hammer out financial terms and as long as 12 months before it passes regulatory muster.
Pernod and Allied almost teamed up six years ago. The talks ran adrift, but the industrial logic today is as strong as it was then. In geographical terms, the two firms' portfolios are complementary, with the biggest overlap in Spain.
There are nagging doubts over funding, but Pernod is gaining an impressive track record for pulling off major coups. It joined forces with Diageo to carve up the Seagram drinks portfolio in 2001, and analysts have been looking for its next move since it lost out on the chance to buy Scottish whisky maker Glenmorangie last year.
Diageo may come up with a spoiler bid with Southern Comfort maker Brown Forman or Bacardi, but drinks industry experts deem it unlikely.
The same goes for a private equity-backed buyout, which would not have the same benefits of a trade deal. A Pernod-Allied tie-up would throw off substantial cost savings and synergies -- somewhere in the order of 250 million pounds ($473 million).
More importantly, the pair would have the scale to negotiate better terms with customers and drive more efficiencies from the combined distribution network.
While the Allied acquisition will push Pernod up to number two in the world pecking order of spirits companies, it will probably struggle to compete against Diageo in terms of the quality of its brands, drinks industry experts said.