Cognac threat to Diageo deal

DIAGEO'S lucrative distribution deal with French luxury products group LVMH is to come under threat if it pursues its interest in the spirits brands put up for sale by Seagram.

DIAGEO'S lucrative distribution deal with French luxury products group LVMH is to come under threat if it pursues its interest in the spirits brands put up for sale by Seagram.

Diageo is believed to be keen to acquire several marks that have become available, following last month's announcement that Seagram was merging its media interests with Vivendi, the French media and utilities combine.

Of particular interest to Diageo is Martell cognac, which could put the company on a collision course with the LVMH chairman and Diageo shareholder Bernard Arnault.

Diageo owns 34 per cent of Mr Arnault's Moët Hennessy business and has a comprehensive distribution agreement spanning France, North America and the Far East. That deal could be jeopardised if Diageo effectively goes head-to-head with Hennessy by acquiring Martell. There are also indications that Mr Arnault would sell his Diageo stake, which he has already reduced from 8 to 2.92 per cent. A spokesman for LVMH declined to comment on the matter.

Mr Arnault crossed swords with Diageo three years ago when he opposed the merger of Guinness and GrandMet which originally created the company. The LVMH chairman criticised a deal that combined spirits and beer brands with food interests including the Burger King fast-food chain. However, Mr Arnault, who at the time was a major shareholder in Guinness and sat on its board, failed in his attempt to combine his Moët Hennessy drinks business with the merger partners.

The fate of LVMH's long-standing relationship with Diageo may be decided in the next two months if Edgar Bronfman Jr, chairman of Seagram, succeeds in his plan to dispose of its spirits labels by the end of September.

As well as Diageo, Seagram's brands are expected to attract the attention of other major drinks groups, notably Allied Domecq and Pernod-Ricard. However, although Mr Bronfman would like to sell the business in one go, it is questionable whether any of its suitors possesses pockets deep enough to fund a bid.

Diageo is keen to cherry-pick its preferred Seagram brands following last week's $10.5bn (£6.9bn) sale of its Pillsbury food business to America's General Mills. Although Diageo will retain a stake in the combined food business for at least 14 months, the sale reflects its desire to exploit its status as the world's largest branded drinks group.

Diageo may also sell Burger King, which had been earmarked for a flotation, to the franchisees who run the outlets. The sale of these food businesses will belatedly leave Diageo with a profile similar to that recommended by Mr Arnault when he originally opposed the merger.