Speculation over the weekend has suggested that Constellation may have to bid over 700p a share for Allied Domecq. Another report claimed that Diageo is loitering in the shadows, preparing to side with either of the two offers.

Citing analysts, the Sunday Times said yesterday (15 May) that Constellation, who has teamed up with Brown-Forman and financial companies Lion Capital and Blackstone Group, will need to look at bidding 700p-plus to trump Pernod's offer of about 674p per share. Allied shares closed on Friday at 692p. The Constellation group confirmed on Friday that they were in preliminary talks with Allied that may lead to a concrete offer.

The Financial Times, meanwhile, suggested yesterday that Constellation could struggle to raise cash for the offer in the capital markets as sentiment in the junk bond markets deteriorates and the cost of financing deals soars. To pay for the bid, estimated by the FT as being around GBP7.7bn, Constellation would need to raise about US$11bn in the capital markets, the paper said.

The FT, citing analysts in its report, suggested that the consortium could face problems funding an all-cash bid in the debt markets because Constellation is already highly leveraged. Constellation has around US$3.2bn of debt, the paper noted.

The Scotsman said on Saturday that Diageo has pegged GBP1bn as a war-chest to get itself in on the carve-up. The paper claimed that Diageo's chief executive, Paul Walsh, is prepared to back either of the rival bids in the hope that it can get some of Allied's wine brands and Tia Maria liqueur.

One industry source told the paper: "It is in Allied Domecq shareholders' interests to get an auction going and Diageo is prepared to give either party a leg-up over the fence in return for some assets. It knows it cannot hope for more than this because, being the dominant group in the sector, there are very few Allied assets that the company could get past the regulators.

"Diageo could easily afford GBP1bn of funding for the bid," the source continued. "It is less than one year's cash flow for the group."

"It is an open secret Walsh has talked to all the main players or their advisers," another source told the Scotsman. "The situation is fluid."