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A consolidated future

Published:  18 January, 2007

After apparently two years of secret talks, Pernod Ricard and Fortune Brands have finally closed in on Allied Domecq, writes Tom Bruce-Gardyne

That the company was open to offers' was no great secret; indeed at times its chief executive, Philip Bowman, appeared to wear a sign around his neck that said just that. Given that he's on for a 14 million personal windfall, one can see why. As I write there have been no rival bids, but presumably these will come. As everyone knows, from Bacardi to Constellation Brands, Allied represents the last big prize in the drinks cupboard. Quite how it will affect the Scotch whisky industry is too early to say. Any comment is pure speculation, but here goes

Despite what some US analysts said about Fortune Brands having its eye on Ballantine's, all the Scotch is to be swallowed by Pernod. Fortune's last experience of Scotch left a bitter taste in the mouth. Having paid top dollar for Invergordon in 1993, it sold it, along with Whyte & Mackay, nine years later, losing some 264 million in the process. With this and the Seagram sale, North America effectively kissed goodbye the Scotch whisky industry, whose non-UK owners are now firmly French.

Of course, Scotch only played a part in all that motivated Pernod and Fortune to make their 7.4 billion offer. But within that part, a significant factor must be the cost synergies' the French could bring to the deal. Put bluntly, there are liable to be hundreds of job cuts in Scotland and at Allied's Bristol HQ. Rationalisation would involve closure of bottling lines and no doubt distilleries, though these would be maintained. Pernod proved it had more than enough distilleries when it mothballed four of the ones it inherited from Seagram and sold another two.

Meanwhile, Allied had been moving in the other direction. Having brought Glendronach back to life in 2002, it was planning to reopen Glenburgie and Scapa later this year. Such investment showed laudable long-term commitment to the category - something not always obvious in the marketplace. In the UK, Allied has treated its main whisky brand - Teacher's - as a cash-cow for years. One imagines Pernod will do the same.

Ballantine's is a very different story. Unavailable in the cash-strapped home market, the brand is an international superstar, selling 5.9 million cases worldwide in 2004, up 6% in volume and value on the previous year. It is neck and neck with J&B behind Johnnie Walker, and enjoys substantial above-the-line support from the Go Play campaign. It is a good profit-earner by all accounts.

As for how it will fit with Chivas Regal, the general consensus is pretty well'. As Johnnie Walker discovered over the decades, the whisky map tends to split into countries that drink standard blends and those that prefer deluxe 12-year-old blends. Pernod has Chivas to do battle in the latter section against Johnnie Walker Black, but nothing to challenge Red Label or J&B.

Part of the attraction of Allied for Pernod is the company's strong presence in the US, where a quarter of all its wines and spirits are sold. Here the key brand is not Ballantine's but Stolichnaya, which Allied has grown by 58% since taking over Stoli's American sales in 2001. The French lack a big vodka brand and, given the intoxicating surge at the premium end of the category, it might well distract attention from Scotch. Until now, whisky represented 42% of Pernod's volumes, which is a lot higher than at Allied Domecq.

Pernod is already the biggest producer of single malt, and no doubt relishes the prospect of owning Laphroaig. The famous Islay malt sells itself with a little added help from whisky guru Michael Jackson, who gave the 16-year-old his highest rating. As such, seeing the standard 10-year-old discounted in UK supermarkets makes little sense. With smartened-up packaging and subtle, behind-the-scenes marketing, a new owner could push Laphroaig up a price point and extract more value.

Assuming Allied's shareholders are not seduced by rival offers and Pernod gets to keep its prize, it marks a further big consolidation of the industry. Is this a good thing? Only time will tell. It is probably inevitable and merely echoes what has happened in the retail sector. A fragmented whisky industry would be less able to fend off rival mainstream spirits and be more vulnerable to retailer power. On the other hand, it will probably mean less choice for consumers, leading to less interest in the category. That, and the likely job losses, is sad.