Allied Domecq and Pernod Ricard have both been downgraded. The two drinks giants, who earlier today (5 April) confirmed that they were in merger talks, have seen their ratings cut to "in-line" from "outperform" by Goldman Sachs. The cut occurred prior to the talks announcement.

The gap between the two companies, when compared to Diageo, has been narrowed in terms of growth opportunity and relative valuation, Goldman feels. It is no longer clear to the broker that, in the absence of any meaningful changes to corporate structure, the long-term relative re-rating of these stocks to Diageo can continue.

Goldman said it now envisages cash returns for each group moving forward at similar rates. This is in contrast to the last couple of years where faster progress has been made by Allied and Pernod, noted the broker.

Pernod still has the strongest organic EBITA growth within the spirits sector, Goldman believes. However, in the second half of last year, Goldman saw a significant slowdown in organic gross margin at Pernod, and marketing reinvestment, when compared to the first half. In Goldman's opinion, this slower momentum, combined with ongoing acquisition, makes it more difficult to envisage any re-rating of Pernod's stock from here.

As for Allied, Goldman continues to believe that there is upside to earnings momentum and the rating if the premium wines business delivers on its ambitious targets.

However, given ongoing weakness in Europe and signs of softening volumes in the US, the broker thinks that there is limited upside from here in the near term especially if the 'bid premium' evaporates.