Seagram deal set to fuel major industry consolidation
For two and a half years now, since Grand Met and Guinness shocked the city and the spirits world with the announcement that they were to merge to form Diageo, talk of further drinks consolidation has been this industry's favourite pastime.
But, a few deals within the Scotch industry and the odd brand acquisition and distribution deal apart, nothing has happened since Diageo formed - until now.
Suddenly, with the announcement that Seagram is to throw in its lot with Vivendi and probably throw in the towel, after 76 years, in the alcohol business, further consolidation is more of a reality than it has ever been.
Moreover, analysts believe that this deal has the potential not only to spark the second major drinks deal in recent history, but also a possible series of smaller deals by companies left in the wake of whoever snatches up Seagram's drinks interests.
This all adds up to quite a change given that the sum of consolidation in the last two and a half years has been little more than a lot of hot air from journalists and companies alike.
Almost immediately the Diageo deal had gone through, the death knell was sounded on every other spirits firm not prepared to grab hold of a partner to create something bigger.
"You cannot survive or compete with this new behemoth Diageo without merging," was the cry of the city. And despite good results and strong performances from their brands, Pernod Ricard, Allied Domecq and friends continued to face pressure from investors to seek out major merger deals.
However, the hype and rumours proved to be all talk and no action. The problem was largely a family affair. Allied apart, the other major firms that can challenge Diageo's supremacy are family run or are under significant family influence.
And, wrestling the control needed for major drinks deals from the families involved has proved harder than anticipated. Nowhere has this been more obvious than at Bacardi where Chip Reid the former CEO discovered the unwillingness of the family to agree to an IPO to raise money for acquisitions. Meanwhile, Allied has been consistently found wanting in persuasive powers in its attempt to convince Seagram's family members of the benefits of a drinks tie-up.
Ironically, given most of the larger spirits companies' public support for further global mergers, the deal that has created the new edge to talk of consolidation has in reality come from outside the drinks sector - although Seagram does, of course, have large drinks interest.
As has been well documented in just-drinks' pages, the three way merger, between Vivendi, Canal+ and Seagram, which got the green light at the beginning of this week, will almost certainly be followed by the new company selling its drinks arm.
Allied Domecq, unsurprisingly, heads the list of candidates ready to make a bid for Seagram's spirits arm. "Allied has always been very open and said 'we need to be part of a bigger business if we are to compete with Diageo', and this is clearly a big opportunity for Allied," said one analyst.
Allied, it has been reported, is already seeking talks with Seagram and it is generally understood that the main ambition of Allied's CEO, Philip Bowman, is to be the man behind Allied-involved consolidation.
The UK company, it is believed, can afford the $7bn price tag analysts are putting on Seagram's drinks business. "I think access to capital in these markets is not an issue for a company like Allied," said one analyst.
Although an outright sale to AD may be Allied's best chance to challenge Diageo's position as the world's number one drinks concern (a Seagram/Allied tie-up would create a company with sales close to 89m 12-bottle cases, while Diageo sold 91m cases in 1999) it is by no means the only option available to Seagram.
Some analysts believe that the Bronfman family, who own 24% of Seagram, may be tempted to use the Vivendi stock they get from a merger to help buy back the spirits division, not wanting to exit a business they have been in for 76 years.
But as an analyst told just-drinks: "I think the problem is that Seagram has a responsibility to the shareholders so they can't just sell it back to the family on the cheap." He explained that Seagram would not be able to pay the same price as a third party who could capture a great deal of merger benefits.
However he went on: "The idea that the family may continue to hold some of the equity in a combined business, ie Allied and Seagram combined, is quite feasible."
Pernod's hat has also been thrown into the ring. Linked with Allied last year, the French company's ambitions to expand are no secret. But, like its counterparts across the Atlantic, Brown-Forman and Bacardi, the strong family influence makes it difficult to call on its possible movements.
"I would hesitate to say Allied are the favourites because the others are family-owned and you never really know the strength of feeling on their part about what is a unique opportunity to merge or buy with another spirits and wine company," an industry follower said.
The question of price is the major stumbling block for all the companies mentioned except Allied. Not only is Allied substantially bigger than its rivals, and therefore able to raise the capital with greater ease, it also has the best portfolio and geographical fit with Seagram, and will therefore be able to benefit from better merger synergies and cost-savings.
The other option available to Seagram and its new partners is to sell the drinks arm off in a piecemeal fashion. This approach would no doubt benefit the likes of Remy Cointreau and Campari, both of which have stated their intention to expand through acquisition if the brand and price are right.
However it is highly unlikely this would be desirable to Vivendi and Seagram, who could be left with residual brands they could not sell.
While Allied and Seagram take the headlines at present there is a feeling among the industry's followers that an AD/Seagram deal could be the spark that lights the fuse of further consolidation.
"In the event of an Allied/Seagram link there may be thoughts turning in other companies. In theory we could then get deal number three," said one insider.
Pernod, before any news of Seagram's deal with Vivendi broke, expressed its belief that "an alliance with another spirits group is always possible be it Brown-Forman or another."
Meanwhile the French group was subject to takeover speculation of its own when Italian company Campari said it was looking to buy in France and was eyeing Pernod. However Pernod has rebuffed this idea, and, Campari itself said on Tuesday (20 June) that it did not have the money to buy Pernod. However, Campari's CEO, Marco Perelli-Cippo did say it was keen to expand. "We have to invest in buying new brands, new activities to broaden our horizons," he said.
A Brown-Forman/ Pernod deal is a possibility. Both have money, Pernod recently said it could "mobilise considerably more than FF15bn, it could also issue shares even if this involves a dilution of family interests."
Brown-Forman on the other hand is believed to still have a considerable chunk of a war chest it tried to use to buy Dewar's Scotch and Bombay Sapphire from Diageo before it was outbid by Bacardi-Martini.
And, both would benefit from geographical synergies, where Brown-Forman is strong in Northern America and Pernod strong in Europe.
Remy and LVMH's best hope of expanding their drinks cabinet probably now lies in waiting to see what Allied does not want from Seagram's portfolio. This is also a viable option for JBB, and indeed Brown-Forman, who both might have an eye on the Canadian whiskey market where Seagram owns 29% of the market and Allied 13%.
The only company that looks out of the equation at the moment is Bacardi, who having rejected Chip Reid's proposed IPO will now struggle to mobilise the cash needed for major deals.
But with all these companies the family question remains a major issue. While Allied's destiny seems sealed - all Bowman's strategies at the moment point at the short-term goal of being bought or buying - it is still difficult to see which family out of the companies left will give up the control necessary for a merger to be possible.
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