Pernod Ricard has had its rating raised. Merrill Lynch has upgraded the drinks company to 'neutral' from 'sell,' on the belief that current takeover discussions with Allied Domecq will lead to a full bid.

An acquisition of Allied would be materially value creative for Pernod, Merrill Lynch believes. Based on a 'most likely' scenario for the bid structure, Merrill Lynch has upped its Theoretical Fair Value (TFV) for Pernod's shares to €109 from €93.

Merrill has assumed that Pernod will bid 675 pence per share for Allied and has calculated an EPS enhancement of 17% once the assumed GBP150m of synergy gains are accessed.

Despite this bullish view, Merrill pointed out that full upside from any deal will not come through until mid-2008 and there will be no 'instant synergies' like in the Seagram acquisition.

Moreover, Merrill highlighted that it has had material questions about the quality and sustainability of the growth coming from Pernod's business and argued that an Allied deal will not solve these issues.