Domecq Update: Constellation in bid talks

Allied Domecq said the consortium was led by Constellation and included US spirits firm Brown-Forman with private financers Lion Capital and Blackstone.

Reports in the UK press claim any bid from the consortium would be all-cash, as opposed to the 80 per cent cash offer in Pernod Ricard's £7.4 billion (€10.3 billion) bid.

Constellation said it was still not certain that the consortium would put an offer forward, yet the move highlights the growing tension surrounding Allied Domecq's potential takeover.

The competition stakes are high with Pernod set to become the world's largest wine and spirits group if successful, grabbing core spirits brands such as Beefeater gin, Malibu and Stolichnaya vodka as well as premium wines including Montana and Campo Viejo.

Analysts have long suggested there may be counter bids and speculation has grown in recent days.

Constellation could use a deal with Allied to bolster its wine business and even gain some new avenues in the spirits sector, while also preventing the creation of a more powerful rival.

Constellation is the seventh largest spirits maker in the world and already owns a range of big wine brands such as Ravenswood and BRL Hardy.

If the Constellation consortium launched a bid, partner-firm Brown-Forman could also play a similar role to Pernod's partner Fortune Brands by taking a tidy share of Allied Domecq's spirits portfolio.

Even the world's largest distiller, Diageo, has been implicated after it announced it would refinance $900 million in debt yesterday; something which may free up cash for the company to pick off certain Allied brands if it chose.

Any company acquiring Allied may also look forward to cost savings that greater consolidation could bring. Philip Bowman, chief executive of Allied Domecq, said consolidation was increasingly necessary in spirits due to tough economic and competitive conditions.

The door for Allied has certainly been left ajar with any Pernod takeover expected to take up to four months and no date yet set for Allied's shareholders to vote on Pernod's offer. But, Allied did agreed to pay Pernod £37 million if it is beaten by a competing offer within the next six months.

Even so, if Pernod is to be successful then it may also have to increase its offer with the Allied share price rising rapidly - up to 75 pence per share by the end of yesterday.

Pernod said it planned to sell a range of Allied's brands to US firm Fortune Brands for £2.8 million (€4.1 million) cash if its bid is successful.

These include Canada Club, Courvoisier, the super-premium Clos du Bois Californian wine brand and Allied's US wine distribution network in the UK, Germany and Spain. Pernod will also sell its own Larios brand.

The move is thought to be an attempt by Pernod to head off competition authorities that may challenge its takeover of Allied due to the resultant market concentration.

Last week, Allied announced a seven per cent rise in net profits this morning to £285 million, though overall sales were flat at around £1.7 billion. Sales of spirits and wine crept up one per cent to £1.236 billion.