As the world's biggest liquor companies claw and fight for growth in a tough industry, Vivendi Universal was more than happy to sell Seagram's drink brands to Diageo and Pernod-Ricard. Trouble is, spurned bidder Allied Domecq says it has right of first refusal to buy plum prize Captain Morgan's.
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Floating in the cocktail that is the joint acquisition of Seagram's wine and spirits business by Diageo (NYSE: DEO) and Pernod-Ricard is pending litigation that could both shake and stir this industry before long. World revenue leader Diageo and partner Pernod-Ricard yesterday said they will split up Seagram between them roughly three-for-two, respectively, and they are splitting the $8.15 billion purchase price by the same ratio. Several forces drove the deal: Newly formed entertainment power Vivendi Universal (NYSE: V) wanted out of Seagram's drinks business, Diageo wanted to continue building its portfolio of spirits brands in its fight with Allied Domecq for the world leader's belt -- all the while hoping to dodge antitrust regulators by bringing in a "second" -- and that "second," Pernod-Ricard, wanted to grow enough to keep from being acquired itself. Consolidation is the word of the moment in the branded wine and spirits category these days, much as it is with packaged foods: Companies are fighting for shelf space and distribution opportunities as they seek levers with which they can drive incremental returns from industries that, on macro levels, aren't growing at rapid rates. A Tuesday Bloomberg story cited Impact Databank numbers claiming sales for the top 100 global liquor brands grew 0.1%, 0.1%, and 0.6% in 1997, 1998, and 1999, respectively. As such, companies like world leader Diageo and Allied Domecq are constantly looking for outperforming brands to fit into their distribution channels: That aforementioned Bloomberg story said while several Seagram brands saw case volumes fall last year, Crown Royal popped up 9% and Captain Morgan's improved 19%. Those recent numbers from Captain Morgan's, which cultivates a "party time" image for its rum brands, are the reason this story bears continued close watching in the immediate term. Allied Domecq says its deal with Puerto Rican Captain Morgan's supplier Destileria Serralles gives it right of first refusal to buy the brand -- a right it would love to exercise -- in the case of a deal. Seagram, which didn't want the rider to hurt its eventual windfall, says the contract doesn't apply in the case of the sale of the whole company, which is what happened with Diageo/Pernod-Ricard. (A good account of the tale is available on the Just Drinks website.) That the deal closed at all before the matter was settled suggests Seagram, Diageo, and Pernod-Ricard are confident about Seagram's chances in Puerto Rico court where the case currently sits. Even so, the merger agreement "provides for certain indemnities from Seagram in the event that the right of first refusal asserted by Destileria Serralles over Captain Morgan is upheld in litigation." Investors in both Diageo and Vivendi Universal should watch the wires closely for more clues about where this story might end: in court, over a negotiating table, or in a bar-room brawl.
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