Allied not likely to fall into the arms of Pernod

Mixing drinks, especially spirits, is not something most drinkers recommend. But investors seemed keen this week to try an as-yet unnamed cocktail of Scotch whisky, gin and pastis.

Allied Domecq shares jumped on rumours that the spirits group that owns Ballantine's Scotch and Beefeater gin is about to receive an unwelcome approach from Pernod Ricard, the French company famous for its aniseed-flavoured drinks which also owns Irish Distillers.

Pernod, whose shares also rose on the news, is said to be planning a £4 billion sterling (€6.3 billion) bid for Allied in an attempt to build a rival to Diageo, the world's largest drinks group formed in 1997 by the merger of Grand Metropolitan and Guinness.

Most analysts doubt the French group could land its larger British competitor with the sort of money rumoured to be on offer.

But many investors believe a Pernod bid would be a catalyst for other groups to enter the fray for another round of industry consolidation.

A tie-up with Pernod is unlikely to be the preferred outcome for Mr Philip Bowman, Allied's chief executive, who has just completed the £2.75 billion sale of the group's pub interests. In May, he said he hoped the new Allied Domecq, number two globally in spirits, would play an active role in consolidation - but he meant by acquisition rather than as a target for a smaller group.

Pernod, the world's fifth biggest spirits group, is largely a European operator with market leadership in the euro zone. It owns Ricard, the fourth best-selling premium spirit globally, but like most of its pastis drinks this is mostly sold in France, which accounts for 30 per cent of group drink sales.

Internationally, it has some small but fast-growing brands. These include Jameson Irish whiskey and Havana Club white rum, ownership of which is disputed with the Arechabala family which fled Cuba in 1960.

Still family-controlled, its market capitalisation is £2.35 billion, compared with £3.8 billion for Allied, so any bid would have to be debt-financed if the families were to retain control.

Much of the bid speculation in recent months comes from reports that Pernod opened a £3 billion credit line in the summer.

"Pernod can afford to pay," says Alex Oldroyd, of Morgan Stanley Dean Witter. "It's a lot of debt but the acquisition would be earnings-enhancing, giving it some genuine international brands."

What a Pernod-Allied deal would not deliver, however, is global scale: Pernod has little in Asia-Pacific, for example, where Allied needs to strengthen its distribution. They overlap heavily in Europe, offering big cost-savings by merging the two companies but a potential problem with competition regulators.

Allied's preferred partner is Seagram, the Canadian entertainment giant whose drinks division is number three globally. There are few product overlaps and complementary geographical strengths and the two came close to a deal after the Diageo merger. But there were difficulties over control - Seagram is dominated by the Bronfman family - and the Canadian group was preoccupied with the acquisition of PolyGram. Its drinks executives - bolstered by signs of recovery in Asia - say the future is bright without Allied.

Others mentioned as possible suitors include Bacardi, the Bermuda-based private company which makes the eponymous white rum. Taking on Allied would almost certainly mean a flotation - something Bacardi told the Financial Times this year it was prepared to consider. But it is still swallowing last year's £1.15 billion acquisition of Dewar's Scotch and Bombay gin and more interested in adding leading brands than joining a group with a long tail of local brands with no growth prospects.

Brown-Forman, a family-controlled drinks group based in St Louis, Kentucky, is another potential partner. But like Bacardi, the family would be reluctant to cede control through a merger.

Hopes of an auction that would boost Allied shares and reward long-suffering shareholders may be premature. One Allied insider says the institutions that own most of the shares would prefer to see what Mr Bowman can achieve before succumbing to a Pernod bid with little premium in the price.

That does not mean Pernod will not bid. As Mr Oldroyd says: "It's the one chance for Pernod to get into the big league - there won't be another."