Diageo and Pernod Ricard have gained new global clout. But what now for the rest of the industry, ask Julian Hunt and Helen Gregory The auction of the Seagram spirits and wines business has been a chaotic and messy affair. But it has also been highly entertaining. The players in this particular drama were six of the world's largest drinks suppliers, who found themselves caught up in a six month long bidding war. At stake: the largest portfolio of drinks brands ever to come up for sale, which gave them a unique chance to secure leading positions in key categories around the globe ­ particularly in North America. And the fun isn't over yet. Dozens of unwanted Seagram brands will soon be up for sale. The distribution rights to Absolut vodka, one of the stars in the Seagram portfolio, are also up for grabs. And a Puerto Rican court has now to decide who has the rights to acquire Seagram's other star brand ­ Captain Morgan rum. More of that later. For now, Diageo and Pernod Ricard are rightly celebrating victory in clinching Seagram with their joint $8.15bn bid. Diageo boss Paul Walsh says the deal is critical to his plans to turn an unloved conglomerate into a Goliath in the drinks business. "This transaction is the next step in transforming Diageo from a food and drinks group with four operating businesses into a focused leader in the alcoholic beverage industry," he says. For Pernod Ricard, the acquisition of a clutch of whiskies and Martell cognac reduces its emphasis on anis, gives it the opportunity to challenge Allied Domecq for the number two spot and strengthens its position in North America. Joint md Richard Burrows says: "The deal gives us a better balance in geographical and portfolio terms and will make Scotch, which is an international drink, our biggest profit earner rather than anis." By carving up the brands owned by what was the world's third largest spirits group, the Anglo-French team is helping to reshape an industry that is ripe for further consolidation. The happy duo expects to complete the Seagram deal by March, after which the two will start to auction off a whole raft of unwanted Seagram brands ranging from Sandemans sherry and port to the Oddbins off licence chain. That process will allow rivals ­ particularly those with niche positions ­ to pick up some juicy assets. But the real interest now revolves around how the rest of the industry's big boys respond to the Seagram deal. Since the formation of Diageo in December 1997 through the merger of Guinness and GrandMet, pundits have been talking up the prospects of further mergers in the spirits industry. Unfortunately such deals have proved highly elusive, either because potential players were family owned, part of conglomerates or heavily indebted. Concerns about possible interference of competition watchdogs also stymied activity among company bosses who took careful note of how Diageo was forced to sell Dewar's gin and Bombay Scotch in the wake of its formation. The lack of progress on further deals was particularly frustrating for Allied Domecq, which made no secret of its desire to participate in any industry rationalisation. So when Vivendi announced in the summer it was buying Seagram for $34bn to get its hands on the latter's vast entertainment interests, Allied Domecq soon emerged as clear favourite to buy the unwanted drinks business. Allied had the financial muscle to do a deal and would not face any significant antitrust problems. Most importantly, the group badly wanted rum and vodka brands. As the deadline for first round bids approached early last October, Allied faced competition from two groupings: Diageo and Pernod-Ricard; and an alliance between Bacardi, Brown Forman and Absolut owner V&S. And then Allied performed three neat side steps that turned the auction process upside down. First it announced it had won the rights to acquire Captain Morgan through a deal struck with a little known Puerto Rican distillery called Destileria Serralles which makes the rum.The second came in November when it unveiled a 10-year US distribution deal for Stolichnaya vodka. And then it bought Mumm and Perrier Jouet champagnes. At a stroke, Allied appeared to have got what it wanted without having to bid for the whole of Seagram. It is now up to a Puerto Rican court to decide whether Allied's attempt to win control of Captain Morgan is legal. Vivendi Universal insists Allied hasn't a leg to stand on. Diageo agrees. And a lengthy legal battle looms. But that's understandable, because the stakes are high. Captain Morgan is the number two rum in the world behind Bacardi with case sales of 4.1m. It is the fastest growing of Seagram's top 10 brands, with volumes up 19% in 1999. And both Allied and Diageo need a major dark rum brand to fill holes in their respective portfolios. Little wonder, therefore, that Diageo insists Vivendi Universal agree to pay back $1.8bn should Allied succeed in snatching Captain Morgan from under its nose. Walsh says that is "highly unlikely". Nevertheless he has told investors that while the acquisition of Captain Morgan is important it "is not the only driver of this deal". Analysts disagree. "Without Captain Morgan, the deal is not that great," says Nigel Popham of Teather & Greenwood. "Many of Seagram's brands were local ones and if Diageo doesn't get Captain Morgan, what it's left with is not really going to add that much quality to the business ­ just scale and size." That's a tad unfair. As well as bulking up, Diageo has acquired valuable North American brands ­ Crown Royal and VO Canadian whiskies and 7 Crown US blended whisky. It also has beefed up its wine business with the addition of Sterling Vineyards; Walsh sees this as a base from which to build what he calls a "value creating wine business". He also believes some of the spirits brands have the potential to be expanded globally. But the attractive aspect of the deal is that it adds massively to Diageo's scale. The world's number one spirits group was twice the size of nearest rival Allied Domecq even before Seagram was put up for sale. Now it owns 18 of the world's top 100 spirits brands; has raised its share of the North American market from 15% to 22%, and boosted volumes by 16 million cases to more than 100 million a year. Pernod Ricard also did well out of the Seagram auction and has moved from number five player to number three, with 11 of the world's top 100 brands. The group may now further strengthen its global position by adding Absolut to its range. Vin & Spirit, the state owned Swedish drinks group, plans to auction the distribution rights to the premium vodka, raising as much as $800m in the process. The rights were held by Seagram. But when Seagram was put up for sale, V&S invoked a clause in its contract that allowed it to find a new home for its vodka. Pernod Ricard is favourite to win Absolut ahead of a possible bid from Bacardi. Although this deal has yet to be decided, and Allied is manoeuvring for power in the Puerto Rican courts, the world's spirits industry is already looking very different to how it appeared this time last year. And there are plenty more changes to come. Like manufacturers in every fmcg sector, the big spirits groups feel they need to keep on getting bigger to prosper in the new global economy. And even though the top three suppliers now control 42% of global spirit sales, there is scope for further consolidation. That process will be given a kick start by the auction of Seagram's unwanted brands. But there must be more takeovers, alliances and joint ventures if the rest of the industry is not to be left trailing in Diageo's wake. Allied, for one, is known to be keen to do deals that will increase the spread of its portfolio and boost its presence in Asia. Having lost the Seagram auction, Bacardi and Brown-Forman are also expected to start on the acquisitions trail ­ as is the ambitious Fortune Brands group. Other second tier players, notably Remy Cointreau, are being tipped as possible takeover targets. But the industry has been here many times before ­ with limited success. That's why the spirits world has been so entertaining. And one thing's for sure, this drama has a long way to go to reach the final curtain. {{COVER FEATURE }}

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