New-look Allied pulls no punches - or pints

Having severed all links with its brewing and pub heritage, Allied can now focus on key brands in the spirits and wine market. We report on the progress made.

Exactly 200 years ago, one Edward Ind bought a pub, the Star Inn in Romford, Essex, and built a small brewhouse out the back.

This tiny business later grew into a regional brewer and pub operator which, after two centuries of mergers and takeovers, has become the modern-day Allied Domecq.

Last week the UK-based company severed its final links with its brewing and pub heritage by demerging its 3,500-strong pub estate and becoming a focused spirits and wine group.

Punch Taverns has begun the process leading up to its acquisition of the pubs along with stakes in off licence giant First Quench and soft drinks group Britvic.

The £2.7bn deal is due to be completed by October 12, but shares in the new-look Allied began trading last Monday. Without the retail arm, their value fell from £5.84, ending their first day on £3.59.

Allied now lies in second place in the global drinks market, although it still lags a long way behind the leader — its annual turnover of £2.4bn is less than half that of Diageo.

Chairman Sir Christopher Hogg and chief executive Philip Bowman, who took over last month from Tony Hales, have begun the task of giving new direction to the business after a long period of turmoil.

There have been mutterings in the City that investors were disenchanted with the management, including the handling of the demerger and the "cosiness" of the original agreement to talk exclusively to Whitbread. The three-month takeover battle cost Allied £27m in advisers' fees, although Hogg claims this was a "creditable figure" considering the size of the deal.

He has admitted the group should have been more open about the nature of the exclusivity agreement but, beyond that, the board believes it did its best.

The disposal of the pubs will save Allied £10m, which will be boosted by a further drive to cut costs and overheads. This includes moving the headquarters from London to its spirits and wine base in Bristol by December.

The group is retaining its "quick-service restaurant" business of fast-food outlets around the world, which accounts for 10 per cent of trading profit. This includes nearly 10,000 branches of fast-food chain Dunkin' Donuts, ice cream franchise Baskin-Robbins and US sandwich retailer Togo's. This leaves 90 per cent of the business dedicated to spirits and wine.

Analyst Nigel Popham, of Teather & Greenwood, said the medium-term prospects for the new Allied looked good.

"The company is much more focused and more tightly run, with a number of good brands," he said.

Up until 31 years ago, Allied was a traditional brewer and pub operator. Edward Ind's descendants merged with the Coope Brewery to form Ind Coope which in turn joined with brewers Tetley and Ansell in 1961 to create Allied Breweries.

In 1968 the company began to diversify and took over spirits and wine group SVPW, which became Allied Vintners. After a complex legal battle, the drinks business expanded in North America by acquiring Hiram Walker-Gooderham and Worts.

After taking over food and drinks giant J Lyons, Allied created the UK's third biggest brewer by setting up its joint venture with Carlsberg A/S. Further expansion, and its most recent name change, came in 1994 when it took control of spirits group Domecq.

The first departure from the past came in 1997 when it excited brewing by selling its 50 per cent stake in Carlsberg-Tetley, setting the group on the path towards this month's demerger.

The strategy for the new company is to focus on its key brands and hunt for new ones through acquisitions and joint ventures. It has also said it would consider selling some of the smaller brands which account for about a fifth of the drinks business.

It has developed a core global portfolio of Ballantine's Scotch whisky, Kahlua liqueur, Sauza tequila and Beefeater gin, which contribute over a third of trading profit.

It is also looking for growth for another 17 key brands that have strong positions in local markets, such as Tia Maria coffee liqueur, Teacher's and Canadian Club whiskies, Presidente and Don Pedro brandies, Harveys Bristol Cream, and Courvoisier cognac.

But, even before demerger, the City was awash with rumours of acquisition talks, such as the whisky arm of Korean-based Jinro.

Hogg said: "The management will remain open to and actively involved in the pursuit of consolidation, including local acquisitions and joint ventures."

According to some experts in the City, Allied has no long-term future without joining forces with a rival. Earlier this year it abandoned merger talks with Canadian-based Seagram, number three in the global spirits market.

Although no comment has been made, Hogg has admitted his team had been "frustrated by the unwillingness of other major spirits companies to participate" in deals.

Like Seagram, many of Allied's smaller rivals are still owned by families who may be reluctant to give up control of businesses that are already operating successfully. Other would-be partners suggested this year have been Bacardi, Pernod Ricard, Rémy Cointreau and Brown-Forman.

Failing this, other options include distribution partnerships which would take it beyond its stronghold of Europe and the Americas into Asia.

Before the demerger, Allied would have been unattractive to would-be partners because of the complexities brought by the retailing arm, according to Nigel Popham.

"It is clearly a much more palatable target than before," he said.

"It will certainly be making acquisitions itself which may be piecemeal rather than huge in the short term. Its brands portfolio is quite well spread but it may be sensible for it to pick up localised brands and local markets."

Allied is now ready to build its place as a global player in the drinks market, a long way from the country tavern in Essex where it was born.