Allied considers spirits demerger to counter Diageo

Allied Domecq reacted yesterday to the threat from newly formed spirits giant Diageo by saying it was considering alliances with other drinks companies and might break itself up if it would help forge a deal. Tom Stevenson, Financial Editor, heard the Bee

Sir Christopher Hogg, who joined Allied Domecq as chairman 18 months ago, said the retailing and spirits group was actively considering all its options, including the break-up it rejected only last year. The recently announced merger of Grand Metropolitan and Guinness to form Diageo had changed the trading landscape for Allied, he said, and made the need for a tie-up with another spirits company more pressing.

Speculation about an alliance with Seagram has swirled around the struggling group ever since Guinness and GrandMet joined forces to create a group with more than twice Allied's sales. Analysts believe the group has no option other than finding a strong partner to enable it to compete with Diageo's massive marketing muscle and global brands.

Diageo will have sales following the merger of 108 million cases a year, more than twice Allied's 47 million. Seagram, the third group, sells 41 million, with no other group reaching 30 million cases.

Sir Christopher said yesterday that a demerger of the spirits side from Allied's smaller pubs and fast-food franchising operations was not a necessary precursor to an alliance, but he admitted that it might be a "facilitator". He hinted at Allied's increasing warmth towards the idea of a demerger by saying: "the issue is more a matter of pragmatism than of principle".

Another development likely to encourage Allied to entertain a demerger is the expected abolition of advance corporation tax (ACT), which has so far acted as a serious disincentive to splitting the group up. Because Allied's spirits profits are largely made overseas, the group needs sizeable UK profits against which to offset its overseas tax bill. Any abolition of ACT would eliminate that problem.

Allied's strategic options were outlined yesterday as the group announced better-than-expected results for the year to August. Profits before tax rose 6 per cent to pounds 607m, while a lower tax charge boosted earnings per share by 18 per cent to 39.1p. Sir Christopher said the results marked a "turning point" for the group, which has underperformed the market and the rest of the sector for many years.

The realisation that things need to change is long overdue for many of Allied's increasingly frustrated investors. The company's shares have underperformed the market by 60 per cent over the past five years, trailing even its struggling peers by 30 per cent over that period. Yesterday they closed 27p higher at 508p as analysts focused on the mooted changes.

In keeping with its peers Allied has suffered from flat demand around the world for spirits but it is also perceived to have a worse portfolio of drinks than its main rivals and to have been poorly managed.

Analysts increased forecasts for the current year after the results announcement but said the numbers were less important than yesterday's messages about the future direction of the group and its management.

Sir Christopher gave his backing to the company's chief executive, Tony Hales, and the finance director, Tony Trigg, who have come under mounting pressure from investors as the performance of Allied has lagged its rivals. Both are returning to their head office roles.

At constant exchange rates, the spirits arm, which includes Ballantines whisky, Beefeater gin and Kahlua among its brands, saw profits rise 6 per cent last year. Margins rose from 15.5 to 16.3 per cent. After a pounds 29m hit from sterling, trading profits fell 1 per cent to pounds 414m, two thirds of the total.

In retailing, where brands include Victoria Wine, Firkin pubs and the Baskin Robbins and Dunkin' Donuts franchises, profits rose 5 per cent to pounds 232m.

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