The Investment Column: Allied needs some action

Allied needs some action

VER since Grand Metropolitan and Guinness announced a year ago that they were joining forces to create Diageo, the most powerful drinks group the industry had ever seen, Allied Domecq has come under growing pressure to do a deal of its own.

The logic of a merger has not been lost on the Allied board. The group is sitting in an uncomfortable position of being number two in a mature and static spirits market. Sensibly, in an industry where brands are becoming increasingly important, it has poured money into supporting its top sellers such as Ballantine's whisky and Beefeater gin. But that will not be enough to generate the sort of leap in profits that Diageo can enjoy as it launches a huge cost cutting campaign.

But masterminding a merger is much easier said than done. For a start the other big players in the drinks industry tend to be run by families, who will take more than a little persuading to give up control of their fiefdoms. Merger talks are taking much longer than Allied had anticipated. And word is chances of a full spirits merger with Seagram, which was always the most likely partner for Allied, are receding fast.

The problem is that while Allied is not doing anything wrong as such, it cannot afford to do nothing. Its share price, which has enjoyed a remarkable resurgence since the Diageo deal, will probably fall if all remains quiet on the corporate front.

Profits for the six months to February were flat at pounds 320m. True the strength of sterling and the Asia crisis dampened earnings. But the figure reveal a disappointing performance from its pub division, which is clearly underperforming the likes of Scottish & Newcastle.

Analysts forecast full year profits of around pounds 610m, putting the shares, which fell 6p to 615p yesterday, on a prospective p/e ratio of 15. Allied's shares are worth holding on to but until signs of deals emerge they do not look cheap.