Arnault may join party after all

Guinness and Grand Metropolitan hope to respond to Bernard Arnault's three-way drinks merger plan on Wednesday amid signs that the gap between the two UK companies and Arnault's LVMH is narrowing.

"Bringing Moet Hennessy to the party is obviously good for the business, but not at any price," said a Guinness spokesman. And though the two companies reacted coolly to Arnault's proposals last week, Anglo-French negotiations may eventually reach an amicable conclusion, according to an executive at Grand Met.

Drinks analysts at Goldman Sachs estimate that adding Moet champagne and Hennessy cognac would yield more than pounds 80m in annual cost savings over and above the benefits arising from merging the Grand Met and Guinness wines and spirits operations.

"There is quite a lot of value from folding Arnault's drinks business in, but he is opening the bidding at a very high level," said Craig Fraser, drinks analyst at Goldman, referring to the 35 per cent stake Arnault hoped to achieve in an enlarged drinks business.

Arnault is chairman of luxury goods to drinks group LVMH, which is a major shareholder in Guinness. In turn Guinness owns 34 per cent of Moet Hennessy. The two companies also run joint distribution ventures.

Both before and since Grand Met and Guinness announced their own planned pounds 25bn merger in May, Mr Arnault has been trying to muscle his way into the deal. To boost his bargaining position, LVMH has increased its Guinness shareholding to more than 14 per cent and built up a 6.4 per cent stake in Grand Met.

Last week, Arnault proposed putting LVMH's 66 per cent of Moet Hennessy into a three-way drinks giant in return for a controlling 35 per cent holding in this new "Drinksco" business, which would be separately quoted.

Guinness and Grand Met's other shareholders would end up owning the rest of Drinksco plus shares in three companies - Guinness Brewing, Pillsbury and Burger King - which Mr Arnault wants to see demerged.

Later in the week his demands softened. An LVMH spokesman indicated that Mr Arnault might settle for less than 30 per cent plus a cash payment.

Goldman Sachs calculates that Mr Arnault is in effect asking close to pounds 3.4bn for the 66 per cent stake in Moet Hennessy. They value the MH holding at pounds 2.8bn.