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Diageo PLC and Groupe Pernod Ricard appear to be close to winning U.S. antitrust approval for their $8.15 billion purchase of Seagram’s drinks business. The two are dividing up Seagram’s drinks portfolio in a 61 percent-to-39 percent split. The question is whether London-based Diageo, already the world’s biggest drinks company, will have to make any big concessions, like the divestiture of a major brand, to win approval. Paris-based Pernod said Tuesday that it expects the Federal Trade Commission to approve the Seagram takeover in September, providing the first hint of an upcoming resolution to the deal. The two companies had originally expected U.S. antitrust approval in July. The deal has already gotten approval from the European Commission. Diageo and Seagram officials didn’t return calls on the matter. Pernod, which is only the world’s fifth-biggest drinks company without its Seagram brands, shouldn’t face antitrust problems in the U.S. because of its relatively small size. Diageo is also expected to get the complex deal through U.S. antitrust review without having to give up any major brands. Diageo already owns Johnnie Walker, Bailey’s, Smirnoff and Tanqueray. The company will take other top brands from Seagram, including VO and Crown Royal whiskies and Captain Morgan Rum. Diageo has also said it will keep Seagram’s Sterling wines. The antitrust review may provide a window into how the FTC defines markets in a big, industry-transforming deal. Instead of focusing on the market for each type of drinks, say whiskey or rum or liqueurs like Bailey’s, the commission may look at Diageo’s total share of top premium-priced brands and its resulting power with distributors, said James Barrett, analyst at Josephthal & Co. “They would get control over so many important brands, they would have unusual leverage over distributors,” he noted. Adding to the complications of the antitrust review is the uncertainty about whether Diageo will get Captain Morgan rum. The rum is made by a Puerto Rican company, Destileria Serralles, which is fighting in a U.S. District Court to exercise its right of first refusal and sell the brand to Allied Domecq. Both Diageo and Pernod have already said they’ll divest dozens of brands out of Seagram’s portfolio, but most of the brands they want to sell are tiny compared to the big premium names. Among the brands Diageo and Pernod are expected to sell are Sandeman’s sherries and ports and Four Roses Bourbon. To determine the appropriate market the FTC often applies the 5 percent test. In that test, the FTC asks if all the brands in a relevant market were owned by a single company, and if the company raised prices by 5 percent, would consumers substitute a different product. But the FTC also sometimes looks at cluster markets — for example, the divergent services provided by banks, from checking accounts to loan underwriting, are still a single market, said Steve Newborn, a partner at Rogers & Wells. For Diageo, intense antitrust scrutiny is nothing new. When the company was formed out of a merger between Grand Met and Guiness in 1997, the FTC ordered it to sell the U.S. rights to distribute Dewars whisky and Bombay Sapphire gin, both highly successful brands today. Copyright (c)2001 TDD, LLC. All rights reserved.

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