Pernod seen using share issue, debt in Allied bid

PARIS - Family-owned French spirits maker Pernod Ricard is set to rely heavily on debt to fund the purchase of UK rival Allied Domecq it plans with US partner Fortune Brands, analysts said on Wednesday.

Pernod Ricard, which on Tuesday announced joint discussions with Fortune to buy its bigger rival, was expected borrow up to £4 billion ($10.69 billion) to pay its part of the deal, and would have little problem raising the cash, they said.

"The purchase will likely have a high debt component because the Pernod family is perceived not to want to dilute its holding in the company," said Nigel Sillis, head of credit research at Baring Asset Management.

Analysts think Pernod Ricard and Fortune may have to pay around 650 pence a share, or £7.2 billion for Allied Domecq, although some said the price could be as high as 700p, or £7.7 billion.

"The potential acquisition of Allied Domecq by Pernod Ricard, with the unspecified cooperation of Fortune, is likely to be fully debt funded," ratings group Fitch said in statement.

However, analysts believe the steady cashflow of the drinks industry make it attractive for lenders, as it allows borrowers to repay debt quickly and recover lost credit ratings. "Given the solidity of Ricard's free cash flow, its modest gearing, and the synergies one can expect from such a transaction, the group could alone mobilise 8 billion euros without putting its financial structure into danger," analyst Cedric Louboutin at Fideuram Wargny wrote in a research note.

Analysts said it was likely Fortune would pay cash for the parts of Allied Domecq it wanted out from the deal, possibly providing up to US$2 billion ($2.84 billion) of the purchase price, raised through a debt issue of its own.

Pernod Ricard would also include a small equity component in the deal, possibly for up to 20 per cent of the purchase price, a source familiar with the situation said.

The prospect of a significant rise in debt on the balance sheet of the combined company triggered warnings to Allied Domecq's current bond holders from both Fitch Ratings and Moody's Investors Service, with Standard and Poor's also saying it may cut Fortune's ratings.

The cost of default protection on Allied Domecq's US$4.2 billion of outstanding bond debt soared on news of the proposed takeover and rose again on Wednesday.

The price of five-year credit default swaps on Allied Domecq was quoted at 80 basis points, meaning it costs 80,000 euros to insure 10 million euros of Allied debt against default. Pernod Ricard shares were up 3.45 per cent by 1450 GMT at 117.10 euros on Wednesday, adding to Tuesday's gains.

Pernod Ricard's debt is not rated.

A deal between Pernod Ricard, the world's third-biggest spirits group, and Allied Domecq, world number two, would put spirits like Chivas Regal scotch and Beefeater gin under one roof and pose a bigger threat to market leader Diageo, though Pernod and Fortune would ultimately split Allied's biggest brands.

The deal's benefits would outweigh the costs, several analysts said. Allied Domecq would provide a stronger base in the United States, complementing Pernod Ricard's clout in Asia and Europe. It also would round out Pernod's spirits portfolio, adding wine labels as well as liqueurs like Kahlua and tequila.

Pernod Ricard posted a 487 million euro ($894.23 million) net profit last year, with an operating profit of 742 million euros at its key wine and spirits division. Its net debt fell 265 million euros to 1.8 billion euros. It had free cash flow of 377 million euros at the end of December 2004, with 6.95 billion euros in assets.

Uncertainly over the capital structure of the merged entity was also an issue for some investors, an analyst said.

Allied Domecq's current medium term note bond programme, accounting for around US$3 billion of its outstanding debt, does not contain covenants, usual in the United States, that would protect bondholders from becoming creditors to what may become a highly-leveraged merged company.

While it was unlikely a new entity would be structured like a traditional leveraged buyout, in which the rights of existing bondholders are often subordinated, there was no certainty the Allied deal would not contain similar elements.

- REUTERS