Merger Mania

As rumours persist over a possible tie-up between Pernod Ricard and Allied Domecq, Caroline Muspratt assesses other contenders in the consolidation game

SO MUCH for the Glen of Tranquillity.  The amount of upheaval at Scotch whisky producer Glenmorangie is enough to make anyone want to reach for the bottle.  One of the last independent whisky makers in Scotland, the company was taken over by the French luxury goods firm Moët Hennessy at the end of last year.

A minnow being swallowed up by a whale of a company is nothing new – but in this case Glenmorangie actually put itself up for sale, when the Macdonald family decided to broaden its investments.

Others are not so lucky, and it’s not just the small independents that are being stalked by potential buyers.  The markets were in quite a stir recently when rumours of a tie-up between Pernod Ricard and Allied Domecq emerged, as investors realised a takeover could be quite a heady cocktail.

Even the world’s biggest spirits groups tend to eye each other’s brands and market positions with a degree of envy, and often the potential cost savings are significant enough to warrant an approach.

Diageo chief executive Paul Walsh said alongside the company’s first-half results recently, "There is no question that there will be a level of consolidation in the industry." 

Referring to the merger between Guinness and Grand Met in 1997 which created Diageo, and the acquisition of Seagram, he said, "We have been at this for over a decade – some of the competition would  like to do what we have done."

David Hallam, an analyst at Williams de Broe, agrees: "Diageo is now beginning to show the benefits of scale and there are others who will want to emulate that," he said. 

Easy targets

Nigel Popham, an industry analyst at Teather & Greenwood, points out, "There are a number of medium-sized companies with complementary brands and geographical spreads."  But he thinks mergers are more the order of the day: "Bacardi, Pernod, Brown- Forman, etc could all be potential merger targets.

They are unlikely to get hostile takeovers as this is an industry which knows each other very well and wants to work together to maximise value for shareholders."

Unfortunately the same cannot be said for Australian wine group Southcorp, which received unwanted attentions from its larger rival Foster’s.  Southcorp called the hostile offer "opportunistic" though analysts do not doubt the logic of putting the two companies together.

They would have around a 28% share of the Australian wine market, rising to about 40% in the sparkling wine segment.  James Dawson, an analyst at Charles Stanley, thinks there are two types of company: "Those that are happy where they are in terms of their dominance, and others that are trying to claw their way up."

He lists Allied Domecq and Pernod Ricard as being among the latter. He adds, "It will be interesting to see what happens at Bacardi, and Remy Cointreau could potentially be a target."

A significant number of drinks companies are familycontrolled, which makes it harder for the market to speculate about their fate.  While Glenmorangie’s family shareholders were keen to sell, other businesses find that families don’t just fall out at Christmas time.

The Molson family, one of Canada’s wealthiest dynasties, controlled the brewer of the same name which recently completed its merger with US rival Coors.  A family feud appeared to be brewing after chairman Eric Molson supported the merger, only to find his cousin Ian  apparently planning to scupper the bid.

Ian Molson, the former deputy chairman, left the company’s board last year after a dispute over strategy.  The ex-investment banker was reported to be preparing a $4 billion offer for the company, though the merger with Coors was successfully completed this year.

Keep it in the family

Nigel Popham thinks family-run firms are less likely to agree to consolidation.  "It makes it more complicated," he said.  "They are less likely to sell as they have greater loyalty to the business than institutional investors might have."

As any company knows, it can be difficult to get a foothold in a new market, but the problem is compounded by trying to understand the red tape necessary to branch out in a different country.

Regulatory issues, bureaucracy, infrastructure issues and the difficulty of understanding an entirely new culture make  markets like India and China problematic.

Many companies have chosen to enter these territories by teaming up with a joint venture partner, or making an acquisition overseas.  It emerged recently that there had been 14 interested bidders for Jinro, South Korea’s largest liquor maker, and both Diageo and Allied Domecq had been rumoured to be in the running.

Analysts say there is certainly value to be had in bolt-on acquisitions which give a company new brands or a presence in a new market.  Diageo recently bought US wine business Chalone and Ursus vodka, whose biggest market is Greece, both of which went down well with investors.

The next round of M&A could potentially focus on the growth markets like China and Russia where consumption of premium spirits and beer is developing rapidly, albeit from a small base.

InBev has taken almost complete control of Sun Interbrew, one of Russia’s largest brewers, while Scottish & Newcastle and Carlsberg jointly own the country’s biggest selling beer, Baltika.

Brewers SABMiller and rival Anheuser-Busch were fighting over Harbin, the Chinese brewery, last year and while Budweiser-maker Anheuser won the deal, there was talk it may have paid too much.

One question on the lips of consumers is whether there will be any noticeable changes to the brands if they change hands.  When Moët Hennessy bought Glenmorangie there was an element of backlash from drinkers who thought it should be kept Scottish.

But David Hallam, an analyst at Williams de Broe, said one of the main changes drinkers are likely to notice is "a more professional marketing of those brands".

Rumour mill

Rumours about tie-ups between the biggest players will never go away.  Whenever a chairman or chief executive makes a comment about consolidation, or muses that a rival has some attractive brands, it will spark takeover speculation.

Some of the rumours will undoubtedly come true, and there is no doubt that there is ample opportunity for consolidation in the sector.  But analysts agree that smaller bolt-on  acquisitions are more likely, so investors waiting for the "big one" shouldn’t crack open the bubbly just yet. 

Caroline Muspratt is drinks correspondent for The Daily Telegraph