I said here last summer that “something big will shortly be happening at Guinness”. In so far as Monday saw the announcement of a proposed 20.6bn merger with Grand Metropolitan, I suppose I was right.
Where many of us were wrong was in supposing that, because rumours of a 13bn hostile takeover bid by Guinness for GrandMet had been categorically dismissed, whatever the something big was to be, it was not going to be a deal with GrandMet.
Well, fancy that. Guinness and GrandMet have turned out to have a taste for conglomeration without having to resort to the vulgarity of a takeover bid. I must say it is unusual for an agreed deal to emerge after a hostile bid has been considered. True, Guinness never launched a bid, but since it had allowed its merchant bank advisers at Lazards to draw up a hostile game-plan under the code-name Project Reflection, we may conclude that it took the prospect of armed conflict seriously.
None of this matters much now. These giants of drinks marketing can get on with the important business of exploiting each other’s global distribution networks, so long as they satisfy the competition authorities, more of which in a moment.
But that mooted hostile bid of last year reminds us that there is no such thing as a merger. Undoubtedly, in this case, it would appear that GrandMet has taken over Guinness. The terms demonstrate that Guinness shareholders will retain their shares in their company, but it will be renamed GMG Brands, while GrandMet shareholders will receive one new GMG share for each GrandMet ordinary share held.
Now, it may be that GMG stands for Guinness MetGrand, but I rather doubt it. One can read too much into the power-play of whose name goes first in the merged entity, but one cannot argue with the division of the spoils. GrandMet’s shareholders will hold some 52.7 per cent of GMG Brands, while Guinness will hold the 47.3 per cent rump.
GrandMet chairman George Bull and Guinness chairman Tony Greener were making folksey noises on Monday morning about their long-standing friendship. Long may it last. I dare say it may last longer than their joint chairmanship of GMG Brands. In this particular bull-fight, my money is on the Bull.
This is not to say the deal is anything other than a good one for Guinness. The City certainly approved. Guinness shares rocketed in the immediate wake of the announcement by 62p to 578p and GrandMet rose 66p to 581p (Allied Domecq, incidentally, was up 5p at 434p, but the new competitive brand pressure can be expected to take its toll).
The key point here is the one I presaged with my “something big” comment of last summer. Guinness’ shareholders had grown restive at the management’s apparently lacklustre performance. Against this background, Greener and his team pulled off a blinder at the year-end, turning in an 11 per cent improvement in pre-tax profits at close to 1bn, with a 19 per cent rise in earnings per share at 35.1p, alongside an eight per cent increase in dividend.
This was undoubtedly to Guinness’ credit, but the problems that had led it to explore a hostile bid for the likes of GrandMet persisted. Guinness is a very mature machine and, having discovered that price promotions were not necessarily good for it, embarked on the development of its brands portfolio and of emerging markets, such as those in south-east Asia.
But this policy is likely to prove expensive in the marketing department and Greener’s board will have known that turning tricks like the 1996 results would be unsustainable. Hence, I suspect, Monday’s big something.
I might add that there is a further benefit for Guinness in this deal (aside from the widely recorded global distribution compatibilities with GrandMet). Guinness has long suffered from its stout heart – by which I mean it has, as a company, been inseparable from its core, synonymous product. This has served to handicap the development of non-stout products such as Harp, Kilkenny and Enigma. In the new corporate entity Guinness at last becomes what it has long wanted to be – simply a brand. And all the more powerful for being just that.
Now, a word about competition policy. The GMG chairmen will claim that they enjoy only a ten per cent market share globally across all their markets and just five per cent of the world spirits markets. In the UK, the picture will not be quite so benign. This could be the first real test for new President of the Board of Trade, Margaret Beckett. New Labour has promised a new partnership with business and here are two Great British companies poised to perform on the world stage. Over to you, Margaret.
And that leads to a point about conglomeration. GMG Brands flies in the face of the demerger fad of recent years. This is a conglomerate, by any standards. Which leads me to wonder whether the Guinness game-plan in GMG is yet played out. Guinness’ performance in spirits will doubtless be enhanced by GMG, but what of its brewing activities? We could yet see shareholder value delivered through a demerger of Guinness’ brewery businesses.