A Bar Brawl over Allied Domecq?

The Pernod Ricard-Fortune Brands bid for the spirits giant could soon see stiff competition from a group led by Constellation Brands

By Beth Carney

Here's a big gulp. If the $14 billion bid by Pernod Ricard and Fortune Brands for Allied Domecq (AED ), the British maker of such tipples as Beefeater gin and Kahlua liqueur, succeeds, it would create the world's No. 2 spirits company. Paris-based Pernod Ricard would end up with the scope to compete in many markets against global leader Diageo. And Lincolnshire (Ill.)-based Fortune Brands (FO ) would pick up some popular labels, such as Maker's Mark whiskey and Courvoisier cognac. For Allied Domecq, the board-recommended cash and stock offer represents a 36% premium over its share price before bid rumors started in February.

Yet Allied Domecq has more than one suitor knocking at its door. On Apr. 27, Louisville (Ky.) spirits group Brown-Forman (BF.A ), the maker of Jack Daniels, said it had joined a group exploring a rival bid led by Fairport (N.Y.)-based Constellation Brands (STZ ), whose products include Robert Mondavi wines and St. Pauli Girl beer. Also in the consortium are private-equity firms Lion Capital and Blackstone.

Industry watchers say Allied Domecq's allure is easy to see. "There's a scarcity factor here that would suggest that others would be keen to get involved," said James Dawson, a beverage analyst with Charles Stanley brokerage in London. "Allied's brands are good strong brands."


  The consortium faces a number of obstacles in mounting a successful challenge. Under the Pernod-Fortune offer, which has been recommended by Allied Domecq's board, Pernod Ricard would pay about 80% of $14 billion in cash and the rest in stock. The French spirits group would then sell a number of brands to Fortune for $5.3 billion. Allied Domecq's franchise food businesses -- Dunkin' Donuts, Baskin Robbins, and Togo's -- are also expected to be sold.

Whether another bidder can significantly improve that offer is a big question, analysts say. With a $5.9 billion market capitalization and about $3 billion in debt, Constellation Brands -- the world's No. 1 winemaker -- doesn't have the resources to mount a bid on its own, according to analysts.

With partners, however, a deal is possible, says Ian Shackleton, beverage analyst with Lehman Brothers, in an interview before Brown Forman announced it was joining the Constellation Brands bid. However, with several partners, Shackleton says it becomes "quite a complicated deal."


  Moreover, Shackleton says, a consortium that splits Allied Domecq's assets among several players would be unlikely to realize the 300 million euros (or $388 million) in synergies that Pernod Ricard expects to recoup in three years. Without those savings, the group may be less capable of improving the offer's financial terms, he adds.

The reason Constellation Brands and others may make an attempt, however, is simply that Allied Domecq represents a rare opportunity for a wine and spirits company to significantly expand its portfolio, analysts say. Many major players in the global liquor industry -- including Pernod Ricard, Brown-Forman, and Bacardi -- remain at least partly family-owned and controlled. As a publicly traded company with an open-share structure, Allied Domecq is comparatively straightforward to acquire.

Moreover, in the past five years, Allied Domecq, under the management of Chief Executive Philip Bowman, has created a strong portfolio of brands. A former pub operator, Allied Domecq sold off that business in 1999. Since then, it has expanded and promoted its range of spirits and premium wines. In 2000, it scored a coup when it acquired the rights to distribute Russia's Stolichnaya vodka in the U.S., giving Allied Domecq access to the fastest-growing spirits group.


  In a global spirits industry where sales are essentially flat -- last year, worldwide sales grew 1.2% in volume -- "premiumization" is considered the best path to profit growth, says spirits analyst Parita Chitakasem of research firm Euromonitor. Allied Domecq's premium portfolio includes Stolichnaya, Courvoisier, and Beefeater Wet gin, as well as premium wines, such as the Clos du Bois and Montana labels.

Allied Domecq also offers potential partners scope. Its products range from standard blended Ballantine's Scotch to its Presidente brandy, popular in Mexico, in addition to champagnes made under the Perrier, Jouet, and Mumm names.

Acquiring Allied Domecq would give Pernod Ricard a foothold in Latin America and greater visibility in the U.S. market, though it would still likely trail Diageo by a considerable margin. The deal would also consolidate Pernod Ricard's strength in Europe, where it would probably overtake Diageo in volume, Chitakasem says.


  For Constellation, the deal would allow it to acquire premium spirits brands, which it now lacks. Other bidders would find similar benefits in filling portfolio gaps.

In short, "It's a prize acquisition," says Michael Bellas, chairman of the New York-based Beverage Marketing Corp., an industry research firm. Shareholders seem to agree. On Apr. 21, after the announcement of the Pernod Ricard deal, all three companies' stock prices rose: Pernod Ricard's by 6.8%, Fortune Brand's by 3.8%, and Allied Domecq's by 3.5%.

For now, the timetable favors Pernod Ricard, since Allied Domecq is planning to put the proposition to its shareholders in June. Regulatory review, however, could extend the process, as U.S. authorities are likely to analyze competition issues created by the deal. One area of potential concern is gin, where Pernod Ricard would claim more than 30% of the market with its existing Seagram's brand and the acquisition of Beefeater, according to a Lehman Brothers' research report.


  If the deal does goes through, Pernod Ricard will have successfully transformed itself from a primarily European operator into a major global player. Five years ago, it specialized in local markets, Shackleton notes. Its core business was anise liquor, popular in France. The $3.2 billion acquisition of some of Seagram's brands in 2001 gave it a global presence. With Allied Domecq's assets, Pernod Ricard would go from producing about 50 million cases of spirits a year today to 77 million, putting it in a much closer league to Diageo, which puts out 90 million.

For Pernod Ricard, Bellas enthuses, "It's just a wonderful, wonderful move." The only question is whether it will pull off the deal before a competing consortium swoops in with a better offer.

Carney is a correspondent for BusinessWeek Online in the London bureau

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