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The City

Published:  18 January, 2007

The City believes that, following EU approval of Pernod Ricard's 7.4 billion takeover of Allied Domecq, the deal is a fait accompli, and that together the two portfolios will provide greater competition to Diageo, which will still be twice as large as the enlarged Pernod Ricard in terms of market capitalisation. Commentators are now speculating on what alliances may be triggered lower down the international pecking order.

The very fact that Fortune Brands will be picking up some of Allied's brands, including Courvoisier Cognac, Teacher's Scotch, Sauza Tequila and Maker's Mark bourbon, means that the Maxxium consortium will be strengthened, especially by the incorporation of Allied's sales network in Spain, the UK and Germany. Some fears had been raised that the other members of the consortium (Edrington, Vin & Sprit and Rmy Cointreau) would balk at Fortune's purchase of competing brands, but those have been discounted and the question being asked is whether the partners will now seek to forge an even closer relationship, possibly including sales and distribution to North America.

Meanwhile, although its attempts to thwart Pernod Ricard and Fortune proved abortive, Constellation Brands has signalled its appetite to develop a spirits portfolio and that it still has the financial muscle to mount a multi-billion pound bid despite being heavily indebted. The same desire to expand has been signaled by Constellation's partner, Brown-Forman. If the squabbling family owners of Bacardi ever agree on that company's future direction, it will play a large part in the next round of spirits consolidation. And nor can the desire of LVMH to add to its luxury brands be ignored as part of the potential equation. As the number of prizes diminishes, the number of suitors rises.

But don't discount Diageo from further acquisitions. Despite the inevitable regulatory problems, Diageo has to find the best use for the considerable amounts of free cash it continues to generate. It confirmed only last week that the share buy-back programme is continuing, but further acquisitions seem inevitable. Diageo's chief executive Paul Walsh played his hand very cleverly over Allied Domecq. After playing the field, he forged a deal with Pernod Ricard that fills a niche hole in his portfolio through the acquisition of Bushmills Irish Whiskey. Furthermore, as part of the price of backing Pernod Ricard, Diageo is now going to add Montana, New Zealand's biggest wine producer, to its armoury.

Previously Walsh had been sceptical about the return on capital from wine businesses, but, as global consumption switches towards wine, it is a sector the world's biggest drinks company can no longer afford to ignore. The problem for Walsh, however, is finding brands with sufficient volume to satisfy Diageo's global market at the same time as generating reasonable margins. How many Montanas are there?