More than a wee dram in Glenmorangie sale

By RACHEL STEVENSON

The Macdonald family that has controlled the Glenmorangie whisky company for 86 years has decided there is more to life than the mists, woods and waters of the Glen of Tranquillity, from which the iconic whisky takes its name and where its roots go back 300 years.

With shares at record highs and volumes of its single malt whisky growing, the family wants to cash in its 52 per cent shareholding.

This will spark the sale of the company, which has not changed hands since 1918 and is the last independent, publicly quoted Scotch whisky company.

Its sale signals an opportunity for more consolidation in the £3 billion ($8.3 billion) UK whisky market, a fragmented and slowing industry.

Glenmorangie claims to be the top malt whisky in the UK, but vies for the title with Glenfiddich, which is owned by William Grant & Sons.

It also claims to be the third-biggest malt whisky brand in the world.

Whisky has been distilled in the area on the banks of the Durnoch Firth since 1703, where Glenmorangie is handcrafted by the "Sixteen Men of Tain".

The Macdonald family got involved in 1918 when Macdonald and Muir, a wine and spirits merchant, bought Glenmorangie.

The last Macdonald to run the business was David Macdonald, who retired as chairman in 1995, although Alison Macdonald is its company secretary.

Even if the company was to be sold at a small premium to the share price, they stand to gain more than £125 million ($344 million) for their stake.

Glenmorangie's chief executive, Paul Neep, says: "The Macdonald family shareholders are getting pretty old - most of them are in their 70s. It makes sense for them to exit while they can control the process and while the company is doing so well."

The company reported a 10 per cent increase in profits in May this year to £9.57 million, with sales up 6 per cent at £68.8 million.

At the top of the list of candidates to buy the company are Brown-Forman, the US drinks giant behind Jack Daniels, and Bacardi. Brown-Forman already owns a 10 per cent stake in Glenmorangie and has a brand distribution agreement with the Scottish company. Bacardi has a similar deal, through which Glenmorangie uses the Bacardi sales and marketing network to push its brands outside the UK.

"The company has done well with these tie-ups to boost its sales capacity," James Dawson, an analyst at Charles Stanley, said. "The family must think there is little else they can do with the business . It's been well run and is outperforming its peers."

Rothschilds, the advisers to Glenmorangie, will undoubtedly have invited Diageo, Allied Domecq and Pernod Ricard to take a tour of the distillery. These three multi-national wine and spirits groups have soaked up most of the Scotch market in recent years and are estimated to control about 75 per cent of Scottish distilleries, with brands such as Johnnie Walker, Teachers, Bell's, Ballantine's and Glenlivet between them.

The Scotch market falls into two distinct camps - the higher-premium single malts for purists and blended whiskies.

Blended whisky, of which the biggest brand is Diageo's Bell's, dominates the sector, accounting for about 77 per cent of volumes.

But growth in the whisky market has slowed through the 1990s, as the drink fell out of favour in the fad for alcopops, which appealed more to female customers. The primary drinkers of Scotch are men aged over 45, with younger people of both sexes preferring to drink imported American whiskey brands such as Jack Daniels.

THE growth of supermarkets and their buying power has also led to price discounting and a commoditisation of whisky.

Sales of blended whisky have been in decline as companies have failed to attract new drinkers. But malt whiskies are proving more popular again and production figures show that volumes of malt whisky are increasing.

Analysts at Mintel believe malt whisky is growing at 10 per cent a year in terms of volume. Despite the dominance of the multi-nationals, Scotch malt whisky, produced in the time-honoured tradition, is still big business for many family owned and private companies.

The Scotch Whisky Association still has 55 members, representing 27 parent companies, and it reports a surge in interest in malt whisky.

The problem for the whisky companies is that not many of its potential customers are even aware of the difference between malt and blended whiskies. So they have been stepping up their investment in the history of their brand and their unique distillation process.

Glenmorangie devotes acres of its marketing material to its use of waters from the Tarlogie Springs and American white oak casks, which have already been used to age bourbon. This is a tradition that dates back to leaner times for distillers, who recycled casks filled with sherry, port and brandy that had been imported on to their shores.

Dawson says: "A few years ago, the bigger companies were only interested in their brand at the top level and sold off their distilleries to others. But we are now seeing people come in to distilling for the first time, and investing and rejuvenating them. Last year, 2003, was our second-best ever for exports and malt exports were up 12 per cent in value.

"People want to tell a story about their whisky - give it an identity and why it is different to others."

Opening up of other markets, such as in China, is also likely to bring about a boost in demand.

Its leading position in the malt market means that it will prove attractive to buyers looking for a brand steeped in Scottish history. But while it does have a strong investment case, on Charles Stanley's forecasts, Glenmorangie is trading at about 23 times earnings.

Dawson says: "This is pretty high, given that there are few cost savings any buyer could make out of the business and the business is already running at full capacity."

He believes Glenmorangie will find it hard to persuade a buyer to pay a premium for the business.

Diageo may find itself blocked from taking on any more Scottish distilleries, given its dominance in the arena. Allied Domecq's focus has been on building its premium wine business and so it is less likely to be interested in Glenmorangie.

Pernod Ricard, however, will likely take a look, and other, private distillers could well be interested.

The Sixteen Men of Tain can expect to be working overtime while the bid process matures.

- INDEPENDENT