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The Federal Trade Commission said Tuesday it would ask a federal judge to bar Diageo’s $8.1 billion joint acquisition with Groupe Pernod Ricard of Vivendi Universal SA’s Seagram distilled spirits business. Yet the news for London-based Diageo was not all bad. In a tie vote, the FTC cleared Diageo’s $10.5 billion sale of its Pillsbury line to General Mills Inc. and the corresponding sale by General Mills of the Pillsbury baking mix business to International Multifoods Corp. For the Seagram deal, the FTC said combining the country’s No. 2 and No. 3 rum makers would be anticompetitive. The vote authorizing the challenge was 5-0. “This will create a dangerous likelihood of reduced competition and higher prices for consumers of rum,” FTC competition bureau director Joseph Simons said in a statement. Seagram is the No. 2 rum producer with the Captain Morgan and Parrot Bay brands, while Diageo, with the Malibu line, is third. The largest rum maker is Bacardi & Co. Yet the FTC and the companies appeared to hold out hope of a quick settlement. While the FTC authorized staff to seek a preliminary injunction blocking the deal, the agency did not actually file the complaint with the court. Diageo said in a statement that the three companies plan to meet with FTC staff in the coming weeks to try to reach a settlement. “We are encouraged by the FTC’s willingness to have further discussions, which we will pursue over the next few weeks,” said Paul Walsh, Diageo chief executive officer, in the news release. For Diageo, compromises over the rum brands will be difficult. “Diageo is between a rock and a hard place,” said James Barrett, analyst at Josephthal & Co. in New York. “It doesn’t want to give up Malibu, which is growing very rapidly, but at the same time one of the main reasons it bought Seagram was to get Captain Morgan.” Malibu’s sales grew 20 percent this year to 2.3 million cases and by 15 percent last year, he added. The other Seagram brand Diageo coveted is Crown Royal Canadian whiskey. That’s because Seagram’s 7 Crown and VO whiskeys are “declining brands” with an older clientele, Barrett said. Failure to complete the sale could haunt Diageo, he added, because the loss of Seagram “takes the sex appeal out of the Diageo story.” Seagram officials said the company had no immediate comment. A press official for Pernod Ricard could not be reached for comment. Antitrust experts said the Seagram case is a warning that the FTC under the Bush Administration will be as aggressive on merger enforcement as it was during the Clinton administration. “When FTC Chairman Timothy Muris said there would only be a change on the margins, he was telling the truth,” said Robert Lande, a University of Baltimore law professor. The FTC could have defined the spirits market as all distilled spirits, Lande said. The theory would be that price increases in rum would cause consumers to switch to gin or whiskey. Instead, it defined a narrow market that made a challenge much more likely, he said. “If you view markets narrowly, you will challenge a lot more mergers,” Lande said. At issue in the Pillsbury ruling was rights to the Doughboy character. FTC staff were concerned that a plan by General Mills, which already owns Betty Crocker, to divest the Pillsbury baking mix line did not include exclusive rights to the Doughboy. FTC staff argued that International Multifoods, which is buying the Pillsbury mixes for $305 million, would have less incentive to aggressively market the mixes if its advertising also benefited the Pillsbury lines it did not acquire, such as cereals and refrigerated cookies. Commissioners Thomas B. Leary and Orson Swindle voted to authorize the Pillsbury deal, while Mozelle Thompson and Sheila Anthony opposed it. Muris was recused because of prior business relationships with the parties. The staffers split 2-2 along the same voting lines on whether to accept the latest settlement offer from General Mills, Diageo and International Multifoods. The FTC needs a majority vote to authorize litigation, with a tie meaning a deal may proceed. Because the FTC rejected the settlement, General Mills is not obligated to sell the Pillsbury baking mix business to International Multifoods for antitrust reasons. But a source said the companies are expected to issue a joint statement announcing that the divestiture will proceed as originally announced. Diageo had better luck Tuesday in Canada for the Seagram deal. Canada’s Competition Bureau approved the transaction after the company agreed to divest the Gibson’s Finest brand of Canadian whiskey and any related assets. “The divestiture of this brand ensures that the market for premium Canadian whiskey will remain competitive,” said Gaston Jorr�, senior deputy commissioner of competition for the bureau’s mergers branch, in a statement. The competition watchdog said it concluded Diageo’s purchase of Seagram’s Canadian whiskey brands, which include Crown Royal and VO, would result in a “substantial lessening of competition in the supply of premium Canadian whiskey products in provincial markets.” Diageo has agreed to sell the Gibson brand within a set period of time. If a deal is not reached, the sale will be turned over to a trustee. The Canadian bureau also said Monday it has no concerns with the Pernod Ricard portion of the deal. – Laura King in Toronto contributed to this report. Copyright (c)2001 TDD, LLC. All rights reserved.

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