Pernod and Fortune Brands seek to buy Allied Domecq

LONDON/PARIS - France's Pernod Ricard and US conglomerate Fortune Brands are in joint talks to buy larger rival Allied Domecq Plc -- owner of New Zealand's largest wine producer.

The deal would dramatically reshape the global spirits business and create two stronger rivals to industry leader Diageo.

The discussions, if fruitful, would initially bring together everything from Chivas Regal scotch, Jim Bean bourbon and Beefeater gin under one roof. Allied Domecq four years ago bought New Zealand's Montana Wines and last year renamed it Allied Domecq NZ Ltd.

Some analysts said the deal could reach US$13.5 billion ($19.33 billion). But Pernod and Fortune would ultimately divvy up Allied's biggest brands.

All three companies stressed the talks were at an "early stage" in separate statements on Tuesday. However, confirmation of the long-rumored talks sent Allied shares soaring 18 per cent on the London Stock Exchange.

One source familiar with the situation said a deal was "a measure of weeks, not months" away. The talks are currently structured to have Pernod lead the transaction and transfer some assets to Fortune Brands Inc. when the deal is completed, a second source said.

Fortune would buy multiple billions of pounds worth of brands, the source said, helping achieve its goal of beefing up its presence in Europe.

"They have agreed in principle, but until they get inside the company (Allied) and do the work, it doesn't mean anything," a person familiar with the situation said.

Allied shares closed at 618.35 pence ($16.62), up nearly 18 per cent, on the London Stock Exchange. Analysts forecast the company, which in addition to Beefeater makes Ballantine's whiskey and Malibu coconut rum, could fetch up to 650 pence a share.

The deal would help Pernod, the world's third-largest spirits group and owner of Chivas Regal and Jacob's Creek wine, close the gap on market leader Diageo Plc.

Pernod almost bid for Allied in 1999 and the two companies' portfolios are complementary, with the biggest overlap in Spain.

Allied's performance has improved since 1999 and some analysts have doubted Pernod's ability to raise the money to buy its larger rival.

It was unclear exactly how much money Fortune would contribute to the takeover. The company said only that it was "working closely" with Pernod in a statement on Tuesday.

But the French company has been rapidly cutting its debt and has a track record of working with other companies to make a successful bid.

Pernod joined forces with Diageo to carve up the Seagrams drinks portfolio in 2001 and analysts have been looking for its next move since it lost out on the chance to buy Scottish whiskey maker Glenmorangie to LVMH last year.

"Pernod has a very good track record with Seagrams, so it will be very difficult to bet that they cannot make it work," said Nikolaas Faes, an analyst at Exane BNP Paribas in London.

"A bid of 650 pence would be earnings-enhancing from the first year," he said, adding he did not expect any other bidders to surface.

People familiar with the situation said Pernod would look to break up Allied, filling in gaps in its own portfolio by taking Allied's major vodka brand, Stolichnaya, and avoiding overlaps that might concern competition regulators.

One said Pernod's aim was to get a deal recommended by Allied's board by the end of the month, but cautioned it was a complicated process that could fall apart.

"The bear in the room is the fact you have the partnership, for antitrust and financing reasons," with two rivals joining forces, the person said, adding that Allied's pension deficit could also be a stumbling block.

Another source said Allied Chief Executive Philip Bowman would leave once a deal was completed.

The cost of credit protection on Allied soared as investors fretted over the implications for Allied's US$4.2 billion of bond debt. Allied is rated investment-grade BBB+ by Standard & Poor's, while Pernod does not have a rating, raising the possibility Allied's rating may be lowered after a merger.

- REUTERS