No Pain, No Gain: OUR MAN'SPORTFOLIO

After the brawl was over ...

AFTER ONE of the most bitter bar-room brawls the lively drinks industry has produced, sweetness and light now reigns at Allied Domecq and its former sparring partner, Punch Taverns.

I watched the battle between unquoted upstart Punch and Footsie blue chip Whitbread for the Allied pubs estate with more than a passing interest. Allied was one of the early members of the no pain, no gain portfolio and the shares, now 568p, have hit 626.5p. They were 482.5p when I tipped them.

Those shares disappear at end of trading on Friday to be replaced on Monday by new Allied shares reflecting the sale of the pubs for pounds 2.7bn in cash, loan notes and 79 million Bass shares. Allied is likely to start its post-pubs life at around 300p, with the Punch offer worth 253p a share. Allied shareholders, who receive the proceeds of the pubs sale, should get details from Punch of its "mix and match" offer next week.

I suspect most small investors will want to take cash or loan notes, leaving the Bass shares for institutions. But there is a case for accepting part of the proceeds in shares although the Bass price has fallen from the 938.5p at which the deal was struck to 838p.

It could be the prospect of 79 million Bass shares hitting the market has depressed the price; there is also the not altogether completely outlandish possibility that Bass will stage one of those remarkable upsurges when the deal is through. Any shareholder who wants a tiny part of the prosperity of the top 650 Allied pubs Bass is acquiring from Punch should consider taking Bass shares. They are also entitled to the brewer's final dividend, perhaps 23p a share. The no pain, no gain portfolio will opt for Punch cash. If some Bass shares have to be taken on board it will probably hold on to them.

In investment terms, Allied has been too long in the Last Chance Saloon. The group seemed incapable of trading out of its plight; a takeover bid or demerging the pubs and spirits businesses seemed its only salvation. We have had to settle for what is in effect a demerger. Now, after taking the cash, the question arises: should the portfolio hold on to the rump of Allied, a spirits and fast food group? I think it should. The new Allied Domecq has to do something on the corporate front; if it doesn't someone else will. Its pubs were regarded as a liability by many other spirit groups when the rest of the industry talked merger to counter the creation of the Diageo behemoth. It was felt the big pubs estate exaggerated Allied's value. There were indications other spirit groups did not want the pubs in any merger sums.

But now Allied is, almost, a pure spirits group with top-class brands. Its relatively small fast-food division will, I suspect, be sold. So a spirits merger with unquoted Bacardi, Brown Foreman of the US, Pernod Ricard of France or Seagram of Canada looks the obvious answer. There is no reason why Allied should not be able to conduct the get-together talks and emerge as the major influence in a newly created and much-needed rival to the all- powerful Diageo.

Allied has enjoyed a happy relationship with Bacardi, is thought to have held talks with Brown Foreman and also got close to Seagram, although there are indications that relations have cooled between the Brits and the Canadians, who have a pub-like handicap with their showbiz side.

Allied cannot sit still. It must merge or expect a bid from one of the other big spirit groups. Pernod has raised pounds 2bn in London, seemingly with Allied in mind. After producing a gain without pain, Allied is worth retaining. It still has some of the tantalising corporate possibilities that attracted me when I tipped the shares before the bar-room brawl broke out.