Philip Bowman's hour has come but the glory of the long-awaited Allied/Seagram merger may take longer than investors hoped, according to a recent Deutsche Bank report.

Of all the major drinks players, structurally and strategically, Allied Domecq is the perfect partner for Seagram's spirits and wine division. Allied's only obstacle, however, could be convincing the City that the sins of the past are truly behind it.

"We think Allied will succeed in acquiring the business but the shares will be held back until the outcome is certain," the report said. "Assuming Allied is successful, the shares are likely to continue to mark time while the stockmarket digests the enormity of the challenge facing management."

Bowman, and finance director Graham Hetherington, took the helm at Allied's lowest point, even contending with the ignominy of the company crashing out of the FTSE 100. Rigorous cutbacks and a new regime of prudence within the organisation has led to massive cost savings, creating an Allied, which could be regarded for the first time in its history, as a lean and agile predator.

If Seagram's price tag is $9 billion (£6 billion), Allied's shareprice must reach the magic 400p threshold but this could take time, according to Deutsche Bank. "In our opinion, if Allied succeeds in acquiring Seagram's spirits business, its share price looks destined to break through 400p, but it will probably take longer than investors think. Part of the synergies will be offset by dilution from the brand disposals that Allied will want to make and be forced into making, in order to obtain regulatory approval for any deal. We believe the Seagram portfolio will require very skilful management," the report said.

Integration may be difficult because the management styles of the two groups are polars apart and any delays will dampen the ardour of institutional investors. With Diageo sniffing around Captain Morgan (possibly the whole of Seagram's rum portfolio) and Pernod Ricard and Remy-Cointreau, alone or in partnership, waiting to pounce, Allied needs clear action and luck, a scarce resource at anytime.

Opponents and non-starters

Deutsche Bank rules out both Bacardi-Martini and Brown-Forman as possible buyers. The loss of CEO Chip Reid and with him, future plans of an IPO, leaves Bacardi "without financial headroom" and lacking a serious management team to pursue acquisitions.

Brown-Forman's market capitalisation of £2.5 billion means the financial muscle is not really there and the family's insistence on keeping control, with its "cautious" management style, which has worked so far, sends out signals that this deal is of no interest. "(The company) has no experience in integrating, let alone running, a major international spirits business," the report states.

Speculation that the Bronfman's would like to retain control of the family jewels is disregarded. "If the family decided to take the spirits business, instead of Vivendi stock, it would hardly be a sign of confidence in the new company. Given that the Vivendi management has been criticised for paying too much for Seagram, it could put the deal in jeopardy if its biggest shareholder (the Bronfmans) were seen to be bailing out." Selling the group in its entirety, Deutsche Bank believes, is the only way forward.

Diageo and Pernod Ricard though are serious opponents who would like to take various brands. Regulatory problems mean Diageo/UDV could not buy the whole operation but, including Schieffelin & Somerset (Seagram's Moet Hennessey joint venture), the acquisition would net UDV a 34% share of the entire US spirits market.

Pernod Ricard's £2 billion capitalisation and the poor synergies for any integration, and with no presence in the US, means its position is weak. The US factor, however, may play a crucial part in its attempts. Pernod has been trying for years to get a foothold in the US market but has been thwarted by distribution and tax disputes. This could be its only chance to crack this market.

Deutsche Bank says: "The most likely outcome is that it could end up acquiring some of the brands in the Seagram portfolio that are not attractive to Allied. The obvious examples are Passport, VO and Canadian Club from the Allied portfolio."

Allied and Seagram - the world's No2

In terms of critical mass, the merger would create the world's No2 spirits business, just behind UDV in volume. "In sales terms, however, Allied/Seagram would actually be larger than UDV but disposals would have to made," the report said.

Size is everything and major cost savings would lead to more investment in marketing and would attract the top people. According to the report, the potential merger synergies would be cost savings of £120m from losing approximately 3,000 employees, and £100m in savings from streamlining purchasing and production operations. Efficiency would be the key.


TOTAL CASED SALES OF DISTILLED SPIRIT SALES, 2000E



Source: Company data, Deutsche Bank estimates


GEOGRAPHICAL SPLIT OF SEAGRAM SPIRITS



Source: Company data, Deutsche Bank estimates


GEOGRAPHICAL SPLIT OF ALLIED SPIRITS



Source: Company data, Deutsche Bank estimates


US SPIRITS MARKET SHARE BY TURNOVER (1998)



Source: Adams Business Media


The report said: "In total, we would expect there to be synergies of £220m…to put this sum of money into context, it represents more than half of the total EBIT generated by Seagram's spirits division, thereby more than justifying the premium being paid."

In conclusion, Allied could afford to pay $8.7 billion (£5.8m) and within three years, when the synergies had been fully realised, Deutsche Bank predicts the merger would enhance earnings by 10%. It also estimates any potential bid by Allied would be financed by £1 billion of equity and £4.8 billion of debt, which could be reduced by £355m of disposals.

For more details of the report, please contact Nick Bevan at Deutsche Bank: 44 (0)20 7545 1595

www.allieddomecqplc.co.uk

www.seagram.com