Allied’s ‘underachievers’ must prepare for a brand demerger

George Pitcher is joint managing director of media consultancy Luther Pendragon

By common consent of business journalists and City analysts of a certain age, the freebie to end all freebies was the Allied-Lyons jaunt of June 1987.

The company hired Concorde for a week and flew us to Scotland, Canada, the United States and France to evaluate its wines and spirits interests.We spent the week effectively staying in a five-star aeroplane and flying in hotels.

But the Allied-Lyons largesse was explained thus. If the trip put just 3p on the company’s share price, then its cost would be paid for several times over. Because the cream of British brewery stockbroking analysis was removed from the City’s newly-installed screens, not to mention the absence of Fleet Street’s finest from the commentary circuit, Allied-Lyons’ share price actually fell that week.

Those were salad days, when we were green in judgment and doused in wine vinaigrette, when Mrs Thatcher was meant to go on and on, and when Peter York still thought the Eighties were a pretty cool place to be. Some four months later, the stock market bubble burst big time and things were never to be quite the same again. But did things really change for Allied-Lyons?

In those days, John Elliott’s Elders IXL had launched a predatory play for the company, claiming that the Australian group could unlock Allied-Lyons’ value for its shareholders. Allied-Lyons responded by acquiring spirits conglomerate Hiram Walker and telling shareholders that the jam was firmly booked for tomorrow’s breakfast.

Today, nearly a decade on, the successor company, Allied Domecq, is still trying to catch the eye of the condiments waiter. And shareholders have grown tired of waiting. Earnings per share will be lower this year than they were in 1992 and Allied’s shares have underperformed the market by some 40 per cent over the same period.

Last week, Allied issued a profits warning, and we can now expect the first half to show a reverse in the order of some 20 per cent. Here we go again. Restructuring and grand plans, followed by profits warnings. What is it with Allied? They are, in fact, not far from where they were a decade ago.

The talk is of unbundling the shareholder value of Allied, and that will require takeover or, as is more fashionable these days, demerger. (If Allied disagrees, I wish to make it abundantly clear that I am prepared to be flown around the world again to see the evidence for keeping it all together). In brand terms, the spirits are not ruling the world, but just about pass muster. Teachers is said in the retail trade to have had a lean Christmas and is concentrated in the UK market, which is declining. Sister scotch Ballantine’s is strong in Europe.

Kahlua is very popular in the US, while the Far East is a principal growth market for Cognac, where Courvoisier has no distribution. Tequila and sherry are strong product lines and Allied is doing well in Latin America.

The spirits division could clearly be made more attractive to another drinks group than Allied can make it for its own shareholders. Seagram, the Canadian group that has sniffed around Allied before, Guinness or Grand Met could develop the brands through their existing and stronger distribution networks, while enjoying the savings of closing Allied’s weaker distributive functions. A question is whether the sale of the spirits division would be more beneficial for shareholders than a sale of the whole shooting match to an unbundler.

In the current climate, it is difficult to identify such an unbundler. The glib proposal under these circumstances was always Hanson.

But, since the great unbundler has now joined the ranks of the unbundled, that course is now closed. It really is extraordinary that, in the takeover absence of Hanson, there is no plausible alternative predator for the whole of Allied.

It is into this acquisitional vacuum that Allied’s prospective valuation disappears. There are those who suggest that a takeover of Allied could be worth 700p per share, but that looks very much like a simple sum of the break-up values of its constituent parts.

Alternatively, other observers put Allied’s value at 400p per share, at most a paucity not reflected by the market, where Allied’s shares currently trade at around 520p. A difficulty is, quite simply, evaluating what the pubs might be worth to someone else. Then there is the retail division, with Victoria Wine at its heart. A buyer of that would be shelling out enough for Allied to repay its 1.6bn worth of debt, allowing it to re-invest in its spirits brands – unless, of course, it has sold them. These are checks and balances that Sir Christopher Hogg, who takes the Allied chair in April, will have to address.

Allied’s shareholders have been dogged by some ill luck in the recent past. Allied lost a small fortune playing the currency markets, then acquired Domecq ahead of the Peso crisis in Mexico. But managements make their own luck and Allied’s shareholders must feel that it is well past time that the nettle was grasped.

The climate is right for demerger. Hogg and his colleagues must undertake it, in some form or another, before matters get worse. The only pity is that, this time, there will be no need for a transatlantic tour.

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