Deal `logical' for Diageo but analysts not so sure


Mr Paul Walsh, Diageo chief executive, yesterday described his team as "very happy guys" as they recovered from the sleep deprivation of the past few days. They had been involved in intense negotiations to conclude the $8.15 billion (€9 billion) purchase of Seagram's spirits business.

Along with Pernod Ricard, Mr Walsh told investors the deal was a logical extension of the strategy he had outlined in July, of focusing the group on "beverage alcohol".

Analysts were not so sure. "Pernod has got the best end of the deal," said Mr Matthew Jordan of ABN Amro. Shares in Diageo yesterday fell 24p to 687p sterling. Outlining the benefits, Mr Walsh said: "Seagram adds 17 million cases to our volume, it moves our market share in North America from about 15 per cent to 22 per cent, and it puts us in categories we're currently not operating in."

As well as broadening Diageo's portfolio of spirits, Captain Morgan rum and Crown Royal Canadian whisky had strong potential outside their existing markets, said Mr Walsh.

However, analysts believed that the looming legal battle over Captain Morgan could prove costly. Allied Domecq, Diageo's closest rival, claims that an agreement with Destilleria Serralles, the Puerto Rican distillery that makes the rum, gives it an automatic right to acquire the brand on a change of control at Seagram. Diageo expects the acquisition to enhance earnings per share from year one, and to cover its weighted cost of capital from the fourth year. Analysts are forecasting earnings 6 to 7 per cent higher in five years' time, but said cost of achieving synergies million a year looked high.

Pernod plans to keep Chivas Regal, Glenlivet and Royal Salute Scotch whiskies, as well as Martell cognac and Seagram's Extra Dry gin. The brands will add 14 million cases and give it greater presence in the US and opportunities in Latin America, Asia and Europe.

The full impact of the Seagram auction on the global spirits industry will not be clear until the fate of Captain Morgan has been decided. But both Seagram and Diageo insist that their deal has been structured to avoid triggering such issues, although Diageo was careful to ensure that Seagram would indemnify it from the risk that Captain Morgan would be snatched by Allied.