Bid for Seagram drinks arm likely

Diageo is considering bidding for a substantial chunk of the Seagram drinks business or teaming up with a partner to make an approach for the whole. The news came as Diageo unveiled details of the merger of its Pillsbury food business with that of General Mills of the US, and the combination of its UDV spirits arm with its Guinness brewing division.

Taken with last month's decision to float the Burger King fastfood business, the moves will leave the group focused on alcoholic beverages. Mr Paul Walsh, chief executive designate, would then have considerable firepower for acquisitions.

Seagram's drinks empire, which includes Chivas Regal scotch and distribution rights to Absolut vodka, will be put up for sale if Vivendi's acquisition of Seagram goes ahead.

But Diageo, the world's biggest spirits group, with brands including Smirnoff vodka and Gordon's gin, would run into competition issues if it bid for Seagram's drinks portfolio on its own.

Mr Walsh said: "I see Seagram as a very attractive opportunity. Clearly we would not be able to retain all of its brands, but we believe there are a number in that portfolio that we . . . could derive substantial shareholder value from."

People close to Diageo said it was considering teaming up with an industry partner or a financial buyer to make its bid.

"It would be fair to say that Diageo is interested in more of Seagram than people have assumed," said one. "Paul Walsh is not going to just sit there and pick up the pieces other people do not want."

Diageo is understood to be interested in brands which are not global but would help it build critical mass in north America. For example, while competition constraints mean it would be unlikely to be able to buy a global whisky brand because it owns Bell's, it might be interested in Crown Royal, the premium Canadian whisky brand.

Possible partners include Moet Hennessy, the drinks business controlled by LVMH, the French luxury goods group, in which Diageo has a 40 per cent stake.

Possible financial partners are thought to include Hicks Muse Tate & Furst, the US private equity group, which has champagne interests, and BC Partners, the venture capital group.

Diageo's main rival is likely to be Allied Domecq.

Mr Walsh said he had far more room to manoeuvre because of the Pillsbury deal. The series of announcements over the past few weeks mark the transition of Diageo into the shape many people thought it should take when it was formed by the merger of Guinness and Grand Metropolitan two years ago.

Mr Walsh yesterday was dismissive of those who said the focus on alcohol should have come earlier. "We have got to look forward, not back," he said. "What is being created here could not have been created years ago." Tax problems had to be negotiated and the merger of the spirits businesses of Grand Met and Guinness had to be proven.

A final exit from food may be some way away but the core of the group is firmly focused on alcoholic drinks. In the short term the plans to bid for all or part of the Seagram drinks business will hog the headlines. Mr Walsh is reticent on that. He is more forthcoming on the plans to develop new brands and the advantages involved in combining the UDV spirits business with the Guinness beer arm.

Mr Walsh points to the success of Smirnoff Ice, the ready-to-drink product that has sold well since its development 15 months ago. In the past year it has sold 250 million bottles in the limited markets where it has been launched.