Pernod Ricard and Fortune Brands are considering a US$13 billion bid for Allied Domecq, the world's second-largest spirits company. Were it to take place, Pernod and Fortune would split Allied's brands between them.

Some kind of consolidation is required. Allied, Pernod and Fortune all suffer from a lack of scale compared to US and global market leader Diageo. This is a significant issue in the US, where Diageo has gained substantially from having the scale to sign exclusive deals with local distributors.

There is also a good brand portfolio fit between Allied and Pernod. The larger firm's top brands are Beefeater gin, Stolichnaya vodka, Malibu rum liqueur, and Courvoisier cognac, while Pernod Ricard's leading brands are its namesake anises plus Martell cognac, Chivas Regal Scotch whisky and Jameson's Irish whiskey.

However, Pernod lags far behind Allied in terms of US presence, so the gains from merging the two firms would come more from cost-cutting than from boosting power over distributors. Since the strategic benefits to Allied's shareholders would be limited, Pernod would instead need to pay a hefty takeover premium to gain control.

Bringing in Fortune Brands, the second-largest US spirits player but a niche firm globally, helps solve Pernod's funding problems. It also benefits Fortune, allowing it to boost its domestic scale compared to Diageo. But since Pernod may need to cede much of Allied's US business to Fortune, a three-way deal could do little to boost the French firm's presence in the most important global spirits market.

A better outcome would be a genuine three-way deal that would create a serious global competitor to Diageo. Fortune Brands' spirits business (which accounts for around one fourth of the conglomerate's total revenues) could be merged into the enlarged Pernod-Allied group. However, there are likely to be too many corporate egos and fiefdoms at stake on both sides of the Atlantic for this to be feasible anytime soon.