Saturday, August 19, 2000

Drinks companies ally to bid on Seagram

Lawrenceburg plant may get new owner

The Cincinnati Enquirer and Bloomberg News

        LONDON — Diageo Plc and Pernod Ricard SA agreed Friday to bid together for Seagram Co.'s Chivas Regal and other liquor brands. With Allied Domecq Plc also planning an offer, the price could rise to $9 billion, analysts said.

        Allied, a distant second to Diageo, said it plans to bid alone. Diageo teamed with Pernod, No. 5 in the liquor industry, to avoid trouble with regulators if it tried to buy the third-biggest distiller by itself. The companies wouldn't say how much they plan to offer for the maker of Captain Morgan rum.

        The rum is made at a Seagram's distillery in Lawrenceburg that employs nearly 700 people. The plant, which also produces Seagram's 7 and Seagram's Extra Dry Gin, was purchased by Seagram in 1933, weeks before Prohibition ended. Seagram is one of the last prizes available to liquor companies as they combine to cut costs and focus on top-shelf liquors amid slowing demand. The price, though, would drop if the Swedish government doesn't allow the license for Absolut vodka to be included in the sale. Allied, which has half the sales volume of Diageo, can't afford to lose either way, analysts said.

        “Allied is likely to be the eventual winner, though Diageo is going to make life very difficult,” said Martin Campbell, a U.K. fund manager at Capel-Cure Sharp, which manages about 9 billion pounds ($13 billion) in securities, including Allied Domecq and Diageo shares.

        Vivendi SA plans to sell the liquor business after buying Seagram for $42 billion to gain the company's Universal Studios and other media operations. Analysts said the sale could be completed by the end of the calendar year if Vivendi's takeover of Seagram wins regulatory approval.

        Allied's shares fell 1.25 pence, or 0.4 percent, to 325. Pernod shares rose 1.8 euros, or 3.1 percent, to 60.3. Diageo dropped as much as 11 pence, or 1.8 percent, to 600.

Chance to grow
        For rival spirits makers, buying Seagram is an opportunity to grow in a stagnant market. The industry's sales rose only 6.3 percent worldwide between 1994 and 1998 because of “extreme market maturity” in developed countries and growing popularity of beer and wine, according to Euromonitor International.

        As a result, the liquor industry has been consolidating. Allied Domecq came into being after Britain's Allied Lyons bought Spain's Pedro Domecq in 1994 to add more liquor brands. Diageo came into being in 1997 with the merg er of Grand Metropolitan Plc and Guinness Plc, instantly becoming the industry leader.

        The Montreal-based Seagram's liquor and wine unit will provide an instant boost to sales and profit to its buyer. The unit generated $4.8 billion in 1999 sales and $684 million in earnings before interest, taxes, depreciation and amortization.

        Seagram drinks such as Captain Morgan rum and Absolut Vodka posted double-digit sales gains in 1999, Seagram said Friday. Absolut contributes about 10 percent of profit at Seagram's liquor business. Drinkers are also shifting toward premium brands, such as Crown Royal and Chivas Regal whiskies.

The Absolut question
        Absolut, however, is sold under license from Sweden's V&S Vin & Sprit AB, a state-owned company, and it remains unclear whether Sweden will want to renegotiate the sales agreement after a change of ownership at Sea gram. Goeran Lundqvist, a spokesman for Vin & Sprit, declined to comment.

        If Pernod and Diageo win the bidding, they would divide Seagram's brands. Diageo, maker of Johnnie Walker whisky and Gordon's Gin, is interested in Seagram's Crown Royal whisky and Captain Morgan Rum, while Pernod wants the Chivas Regal and Glenlivet Scotch brands. Some other brands would be sold.

        The planned joint bid isn't the first time Pernod and Diageo have worked together. They already have joint ventures in Brazil, Japan and the U.S.

        London-based Diageo plans to sell shares in its Burger King restaurants to the public and shed its Pillsbury food business to focus on liquor. UBS Warburg is advising Diageo on the Seagram bid.

Vivendi, Bronfmans
        Vivendi, a French utility turned media company, said from the start it would sell Seagram's liquor business to pay down the $6.7 billion in debt it inherited with the purchase. Vivendi shares have fallen 14 percent since the Seagram takeover was announced amid investor concern the purchase price will weigh on earnings.

        Seagram attracted Vivendi because of its transformation into one of the world's biggest media companies under chief executive Edgar Bronfman Jr., who used the distilling business founded by his grandfather to finance the expansion into film and music.

        The sale of the drinks unit has attracted the interest of most major liquor companies, with Remy Cointreau also confirming it's interested in some of the brands.

        Charles Bronfman, co-chairman of Seagram Co. and Edgar Jr.'s uncle, may be preparing his own bid for the company's spirits business, the Sunday Telegraph reported Aug. 6 without citing sources.

        Morgan Stanley Dean Witter & Co. is handling the sale on behalf of Seagram.


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