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Diageo, the world’s biggest drinks maker, is working to quickly resolve its deadlock with the Federal Trade Commission — which voted to challenge its $8.5 billion acquisition of Seagram’s drinks last week — while making sure it doesn’t risk losing major rum names Captain Morgan and Malibu, according to analysts. The FTC voted unanimously to block Diageo’s acquisition of Seagram’s drinks because it would combine the No. 2 and No. 3 makers of rum in the U.S. Seagram’s Parrot Bay and Captain Morgan brands hold second place, and Diageo’s Malibu third, in U.S. rum sales. One solution London-based Diageo is likely to pursue is a sale of Malibu to Pernod Ricard SA, its partner in the buyout of Seagram’s drinks, which was announced in December 2000. Diageo could then negotiate a side agreement to purchase Malibu back from Pernod if it loses Captain Morgan rum. Seagram’s, the brand’s supposed seller, is embroiled in a legal dispute over the brand’s ownership with Destileria Serralles, Captain Morgan’s Puerto Rican manufacturer. A Pernod spokeswoman declined to comment on whether Diageo and Pernod are discussing an acquisition of Malibu with a repurchase provision. “I can’t confirm anything,” said Laure Lagrange, a spokeswoman at New York’s Citigate Dewe Rogerson, which represents Pernod Ricard. “We’ve been saying that we’re looking at all the options,” said Isabelle Thomas, spokeswoman for Diageo. “We’ve had quite a few approaches [on Malibu].” For Pernod, financing a possible acquisition of Malibu, with gross profits of �73.7 million ($107 million), is an immediate issue as it’s already stretched by its acquisition of its portion of Seagram, which includes Chivas Regal and Glenlivet scotch whiskies and Seagram’s Extra Dry gin. Pernod is purchasing that drinks package for about $3.18 billion. One possibility is that Pernod could finance an acquisition of Malibu, valued at about �750 million, by doing an equity offering, said Matthew Jordan at ABN Amro. Pernod could always turn around and sell Malibu to a fourth party, such as Brown-Forman Corp. The Louisville, Ky.-based maker of Fetzer California wines as well as “brown spirits,” which include Jack Daniels whiskey, is interested in Malibu, bankers say. Malibu is a much smaller brand than Captain Morgan, with 1.9 million cases sold versus 3.6 million in 1999, but it would be a valuable addition to almost any big wine and spirits company. Malibu’s sales grew by 11 percent, while Captain Morgan grew 21 percent between 1998 and 1999. Finally, in this negotiating for the two brands, there’s yet another player. Allied Domecq, the second-largest spirits maker in the world, is backing Destileria’s lawsuit with an agreement to buy out the Captain Morgan brand if it wins the case, which has been waiting on a decision by a U.S. district court judge in Puerto Rico for months. Allied could solve everyone’s problems at once, however, if it and Destileria decide to settle with Diageo. It may very well decide to do so and pursue Malibu, a surer bet, analysts say. “If Allied feels the court decision on Captain Morgan is unsure it may want to go after Malibu, but that’s only if they feel the litigation is on shaky ground,” Jordan said. “We’re not in any discussions with Diageo,” said Jane Mussared, spokeswoman at Allied Domecq. “We look at all good brands as they arise, and if Malibu does arise, then we would look at it. But that’s part of our general strategy.” James Barrett, analyst at New York’s Josephthal & Co., said the Allied solution is the most likely to win. “Philip Bowman [chief executive officer of Allied] is a pragmatist, and any lawsuit like this one is a wild card,” he noted. The court case turns on Seagram’s contract with Destileria to manufacture rum for Captain Morgan. Destileria claims that it has a right to buy out the Captain Morgan trademark if it is transferred through a sale — such as that of Seagram’s drinks to Diageo and Pernod. Whatever rum brand Diageo ends up with, Hemingway-like, it needs it soon. The company is under pressure from Pernod and Seagram, and Seagram’s parent Vivendi Universal SA, for a resolution to be quick. “Diageo is under a very tight schedule. They have to resolve this in two to three weeks,” Jordan said. Copyright (c)2001 TDD, LLC. All rights reserved.

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