Outlook: Embarrassing questions for Allied

SIR CHRISTOPHER Hogg and his board at Allied Domecq seem to be in a dreadful pickle over the disposal of the group's pubs estate. They would not themselves admit this, of course, and indeed on one level, they are indisputably sitting pretty. Their share price keeps rising and they are now in the happy position of having two competing bids on the table for the 3,500 pubs.

However, it is not quite that simple. Sir Christopher, has got himself into the uncomfortable position of backing just one of those bids - a pounds 2.4bn all shares offer from Whitbread - and he has done so on terms that seem to preclude him from giving adequate consideration to the competing, higher offer - a pounds 2.7bn all cash bid from Hugh Osmond's privately owned Punch Taverns. How could this have come about? On the face of it, Mr Osmond's bid packs a bigger punch and yet Allied has committed itself to a lower offer. A breach of fiduciary duty, surely? Well not quite, or at least the case is not yet proven.

Over the years, Allied has received many half-hearted offers for its pubs, including one from Punch. When Whitbread came knocking five months ago, it seemed serious, and Allied agreed to exclusivity in an attempt to secure a deal. Allied's defence is that without this exclusivity, Whitbread would have walked away and there would today be no deal, or certainly not one on anything like the same terms.

Regrettably, this very same exclusivity agreement now seems to be working against Allied in securing the best possible terms. Mr Osmond says he might be persuaded to raise his offer if Allied was to provide him with the same information as that given to Whitbread, but that, according to Allied, would be a breach of the exclusivity agreement.

Any such breach would trigger an immediate penalty payment to Whitbread of pounds 25m. Whitbread would also have no obligation to continue with the transaction. Nor, having carried out his due diligence, would Mr Osmond be under any pressure to bid more; he might even be able to reduce his offer. Ergo, there is no point in risking it.

So why not level out the playing field and allow shareholders to chose between the two offers as they presently stand? That too, argues Allied, would risk breaching the exclusivity agreement.

Punch disputes it, but according to Allied, merely to adjourn the shareholders meeting to vote through the Whitbread offer so that adequate consideration can be given to the Punch bid, would allow Whitbread to walk away and claim its pounds 25m.

It can readily be seen what a legal and technical minefield Allied has walked into.

Still, no matter, says Sir Christopher; the Whitbread offer is the better one anyway. Since the deal is value enhancing to Whitbread, he argues, Whitbread's share price will rise once it is appreciated that the prize of the Allied pubs has definitely been secured.

Ultimately the Whitbread offer will thus come to be worth more than Punch's. This is obviously a question of judgement, which interestingly, Allied's own advisers, Goldman Sachs, have been unwilling wholly to back. Any such view, they say, rests on "Allied Domecq directors' commercial assessment of the proposals". Sir Christopher must sometimes wonder what he pays these boys for.

In any case, this assessment must be a very considerable one. Don't forget that Allied shareholders only get 32 per cent of the combined company, which in turn means less than a third of the synergies derived from combining the two retail chains are attributable to them. In order to justify accepting an offer which is pounds 300m lower than the alternative, Sir Christopher therefore has to assume that the deal will create more than pounds 1bn of value for Whitbread. Anything is possible, but this is not an easy case to argue.

The Allied board plainly faces some very awkward questions. If Mr Osmond could be persuaded to raise his bid another pounds 200m, it would seal the deal and get Sir Christopher off the hook. Unfortunately, Mr Osmond seems to be enjoying the fight too much to agree such a gentlemanly outcome.