The spirits marketing industry has spent the past few months wondering what to do about the leviathan tie-up that gave us the company formerly known as GMG Brands. Regular readers will know that this column has taken a principled stand on not using the new identity of this company, which sounds like one of the names that Daewoo rejected for its latest range of cars. Following the example of pop star, Prince, I am therefore forced to resort to the “formerly known” formula – or perhaps the acronym FKAGMG, which sounds better anyway.
Efforts to challenge FKAGMG have predictably enough led to renewed speculation of a takeover bid for Allied Domecq. This is possibly the hardiest perennial of all takeover rumours. I recall being flown around the world by what was called Allied-Lyons in 1986, in an attempt to persuade me that true shareholder value was vested in independence and a future with its strategic acquisition, Canadian spirits combine Hiram Walker, which we were repeatedly told was more than a poison-pill defence against Australian predatory brewer Elders IXL. That, of course, was all before Allied-Lyons managed to slash away several tens of millions in the financial derivatives markets and discovered the defensive charms of Domecq. None of which has fulfilled the company’s declared destiny as a global power in spirits distribution, ready to take on the might of a combined Guinness and GrandMet. FKAGMG sells 108 million cases of spirits worldwide, against Allied Domecq’s 47 million.
You can get squeezed out of some seriously lucrative markets by that sort of muscle, particularly in developing markets in the Far East. So the hardy perennial rumours sprout once more through the January frosts. Allied is to seek a deal with Canadian drinks and leisure group Seagram, which is ranked third in the international sales volume chart with 41 million cases a year. In volume terms, such a deal would put Allied-Seagram within striking distance of the megalith on top, though there would doubtless be rationalisations in markets in which Allied competed with Seagram. More importantly, an Allied-Seagram combo would be worth 4bn annually in sales and something really ought to be possible with margins, to the shareholders advantage, on a turnover like that.
The first thing to say about such rumours, however, is that they arise from the very same syndrome that I identified last week in the British retail industry. Rationalisation precedes consolidation – witness what will happen to the WH Smith and Debenhams businesses. Thus it is with Allied. It has long talked of a demerger of its retail and spirits sides, but when it happens it will look very much like a consolidation in the spirits industry as Seagram or one of the family-dominated groups looks to reverse into it.
It doesn’t, of course, have to be Seagram that does the consolidating. It would probably have to issue a lot more paper to take on Allied, and it’s perfectly plausible that a counter bid could come from the ranks of American Brands, Bacardi Martini, Pernod-Ricard or Brown-Forman. The good news, for Allied’s shareholders, is that a contested bid will push the price up; the bad news is that the family-owned equity structures, which bedevilled the French cognac houses in their efforts to consolidate in the Eighties, are still highly constraining in the otherwise cosmopolitan spirits industries.
There are other irritations that could spoil Allied’s consolidation party. There may be more that marries Allied and Seagram, for example, than separates them, but that is not to say that there aren’t full-blown incompatibilities that fly in the face of a full merger of the two companies.
The most obvious of these is at the leisure and retail end of operations. Seagram has Universal Studios in Hollywood and a strategy that some say has largely been driven by the vanity of a new generation of the controlling Bronfmann family, rather than by commercial imperatives. Allied has pubs, such as the Firkin chain, and retail outlets such as Dunkin’ Donuts. Call me old-fashioned, but the synergies don’t leap off the page.
None of this is meant to suggest that a deal won’t be struck between Allied and Seagram. All I’m saying is that these factors mean that it won’t be a slam dunk – or a slam-dunked donut. There is the contested bid scenario, made more complicated by vintage family structures. Then there is the Bronfmann family structure that produced
Hollywood dreams and promises the unlikelihood of a complete merger on the Guinness/GrandMet model.
Much more blood will be on the carpet before the international spirits industries have shaken themselves out to a degree where they can compete on a truly equal footing and in the manner of mature businesses. I would add that, perhaps because of those quarrelling families, spirits combines have never been very good at acting like grown-up international businesses.
Only this week, we had one of them whingeing that the strength of sterling was going to wipe 140m off combined annual earnings last year and that this year was looking much the same. You don’t catch truly international companies, such as Coca-Cola, Nike or the aerospace giants talking so parochially. So who was this company? Why, step forward Diageo. Oh, damn.