The City

The City timetable means that any rival bid to Pernod's must be made by 29 June, but acceptance of Pernod's terms may not be the foregone conclusion it once seemed. Certainly, the deal struck with Diageo (see page 5) has strengthened Pernod's hand, and the bid has been both recommended by Allied's board and is at a considerable premium to Allied's share price of just 12 months ago. But the big unknown is whether Constellation Brands, with Brown-Forman and two private equity houses, will mount a rival offer if they can raise the cash to top Pernod's 670p per share. By last weekend, it seemed several US institutions were willing to lend up to $14 billion.

Pernod's rivals have already lodged an indicative offer and are poring over Allied's books. Although two private equity houses are in the team, they will not overpay, and there have been doubts about Constellation's ability to raise cash. Following the takeover of Mondavi, Constellation is already highly leveraged with some $3.2 billion of debt. It has huge cashflows, but its bonds are already lowly rated. Their BB status means Constellation's bonds are already rated as 'junk', reflecting the higher risk of potential default. This means Constellation's potential financing costs could be heavy. In addition, the break-up of Allied by four partners will incur heavier capital gains tax penalties than does the Pernod Ricard deal.

What is more, the recent US ruling that United Airlines can downgrade its pension fund commitments to stay in business puts further pressure on Constellation. Allied has a pension fund deficit of 387m and its trustees have the right (and probably the obligation) to demand that the UK pensions regulator requires any bidder to make good the shortfall before a takeover is permitted. Pernod has already pledged to pay 108m into Allied's scheme over two years to tackle the deficit. The US ruling means that Allied's trustees will want very firm guarantees from Constellation, possibly even for the pension scheme to be fully funded from the outset.

None of this means that Constellation and its partners are financially troubled. Far from it. It's just that Pernod's bid for Allied could not have come at a worse time for them. The cost of raising the finance, the pensions ruling and the weakness of the dollar combine to make the numbers more difficult to justify. However, Allied's portfolio will not be on offer again. If Constellation's team can make the numbers work, they will. But time is short.

• Harpers Says...