And The Brand Played On

06 May 2005 By db staff writer

d=”standfirst”>The name Allied Domecq will surely be consigned to history; it’s what it created that suitors are clamouring for. By Matt Guarente and Rob Griffin

Pride, envy, anger, avarice, sadness, gluttony and lust: a good M&A story has them all. Far from being sins, in the bearpit of global consolidation they are either essential attributes for success, or corollary emotions of failure. Pride, envy, avarice, lust and gluttony naturally fit in the former camp; for those missing out on the spoils, pencil in envy , anger and sadness.

The most recent elevation of passions is over a drinks company. What is at stake here is one of the last remaining, most significant, and available (by being a listed company) prizes in the global spirits markets. For shareholders, it is being seen as a great deal. “Allied had probably got to the stage where it was as good as it was going to get,” one City source said. “If you were going to do a deal, now would be the time – it’s better to sell out at the top rather than waiting until you’re heading back the other way.”

Quite so. Even though it is unlikely that Philip Bowman was grooming Allied Domecq to be a takeover candidate, he has won plaudits for bringing the company back to life. Stuart Price, an analyst at Panmure Gordon, said: “He’s done a remarkable job taking the company from where it once was, an accident-prone business that had no real strength in any of the spirits brands it had, no real exposure to growth and one that was generating generally lacklustre returns, and  turning it into one that’s been completely revamped.” He had warned Pernod during negotiations that there would have to be a significant offer – and it was duly delivered. Then pride reared its head, followed by its close cousins, and suddenly everyone wants a go.

Will we see a spoiling bid? “This is the last opportunity to gain a major leg-up in terms of market share and it has, unsurprisingly, brought other bids out of the woodwork,” Price said. “As it stands now I think a counter-bidder  would have to have an all-cash offer.” That 11 merchant banks have been engaged as advisers tells you there are a lot of would-be raiders on the Allied brand cabinet.

This is the crux of the matter – that modern drinks companies are like conglomerates. Their brands are run like separate businesses and, indeed, appear that way to their consumers. When Norm Wesley, CEO of Fortune Brands, was wheeled out to explain to the press the value of what he was buying, he used the ‘B’ word eight times.

“When you talk about most drinks, the brand is pretty much all there is,” says John Band, senior analyst at Datamonitor. “That’s definitely the case with Allied. There’s also some value in having sales relationships but in terms of takeovers that’s less important because they will have their own distribution lines in place.”

Pernod-Ricard, for its part, has made decentralisation and semi-autonomous running of its brands a core of its business philosophy. 

So buying Allied is all about adding to your brand value? “Massively,” says John Allert, chief operating officer for the consultancy Interbrand. “In the past decade we’ve valued portfolios for drinks companies, many of them for balance sheet applications, so we’ve seen directly that an increasingly large part of the balance sheet is tied up with intangible value.”

So if anyone moans that a very full price is being paid for Allied, it needs to be borne in mind that it’s the brands, and their value, and the ready-made markets that they bring with them, that count. 

“Consolidating businesses are aware that brands offer security of demand,” Allert says. “You’d be hard pressed to find anyone sitting in a bar who knows who owns Beefeater, or who cares, as long as they can drink it.”

The logic of a Pernod-Allied deal, as expressed by their respective bosses, is that it delivers a cash-out to Allied investors at a record stock price for that company, while Pernod gets a better shot at the US market with some top-scoring brands and a distribution channel to match.

The noble squire in all this is Fortune Brands. Fortune (which looks to drinks for just over one dollar in every seven of its sales) has had its card marked for about a third, or $5.3bn-worth, of the total sale value of Allied’s brands. Together, they bring in $1.3bn a year in sales, so Fortune is paying four times revenues for these brands and a little more clout with wine distributors as it acquires Allied’s channels to market in  the US.

Great for Allied shareholders; not so hot for the buyers? “It’s a high price,” a senior industry figure advising one of the parties involved in the deal said, “because the takeover premium was already in the price, and Pernod and Fortune are paying another premium on top of that.” 

Why did Pernod not try when the price was lower? “Because they still had too much debt on the balance sheet from the Seagram deal.” Why did Allied not get its own chequebook out sooner? “Allied had been quite keen to lead consolidation rather than become a target of it, but it had become increasingly clear over the past few years that there wasn’t anyone they could realistically buy because the remaining companies that were attractive targets were family owned,” Datamonitor’s Band said.

For Allied, what began as a nine-month negotiation that ended in the offer of 670p a share from Pernod quickly became a have-your-cake-andeat-it situation. 

Bowman was cited by the press as being open to other offers, and there were insinuations that the board was, in fact, rather irked that the global number three spirits company – and a French one, at that – should have a pop at the number two. Pernod’s shareholder structure, with complex family cross-holdings, effectively prevents a takeover the other way round.

Meanwhile, jingoistic mumblings were exacerbated (or perhaps invented) in the press, and while Bowman said there had been no problems in the negotiations there seemed an edge to his voice when he talked about cultural problems. There are other problems for any potential buyer of Allied, including a pensions fund shortfall of £387m, as well as liability for any capital gains tax if any of the assets are subsequently sold on.

All this notwithstanding, the Square Mile thinks Bowman is delivering a good deal. One equity analyst, who spoke  on condition of remaining anonymous, said: “From a City perspective he [Bowman] has done a fantastic job given the hand of cards that he was dealt. A lot of industry observers – ourselves included – had felt that Allied was a pretty terminal case before he arrived. He has delivered the business on a plate for shareholders to be able to get a good exit price.”

Nikolaas Faes, drinks industry analyst with Exane BNP Paribas, agrees: “Allied Domecq has improved dramatically over the past few years since the arrival of Bowman, and areas such as the operating profits are growing in line with its rival, Diageo. Before he arrived, it was lagging behind.

“He has brought in the right teams, made some bold acquisitions – which people were initially sceptical about – and has created a very valuable company. I think he’s done a very good job.”

And got a good deal for shareholders? “I think the valuation is absolutely fair. I have put a valuation of around 525p per share so the bids represent a premium for shareholders,” Faes says.

So, the big question – what’s next? “There’s going to be a lot of investment bankers trying to devise ways for everyone in the spirits industry to take everyone else over without the founding families losing control of the companies,” Datamonitor’s Band suggests. “It will be a growth area for investment bankers.”