Global Allieds

With the market leaders involved in a brand battle, the wine and spirits sector is anything but dull. Mary Murphy meets Allied Domecq’s Russel Kelley and finds out that global consolidation is the only way forward.

Last year witnessed what can only be described as a veritable clash of the titans, as rival drinks giants Allied Domecq and Diageo battled to gain control of the Seagram brands and business.

Although Diageo’s bid was successful, it could be argued that in the long-term the industry is the winner as the deal pointed the trade in the direction it wants to go – towards consolidation.

Many in the press and industry saw the withdrawal of Allied from the bidding process as, at best, a minor defeat. But the company may find its star rising again if it manages to finalise its attempt to acquire Captain Morgan rum. The acquisition was instigated by a controversial strategic alliance with Destileria Serralles. Serralles, the distillery which makes the rum, claims that it had a right to first refusal of the brand if Captain Morgan changed hands.

Allied signed an agreement with the Puerto Rican distillers in October last year. Under the deal, the brand, which at the time was part of the Seagram portfolio, would be passed to Allied when Seagram was sold. However, this agreement deprives Diageo of a major brand that it expected to accrue as part of the Seagram purchase.

Seagram’s business was initially valued at about $8bn (£5.5bn), but should such a well known brand be ruled out of the deal the price could drop by as much as 20 per cent. The strategic alliance is a major success for Allied. It could integrate one of the main brands from Seagram’s portfolio without having to take on other less lucrative brands – maximum advantage with minimum expenditure.

The deal depends on the success of ongoing litigation in Puerto Rico being fought out on the enforceability of the rights of first refusal. Serralles argues that its brand was being sold and as it has the right to first refusal, it says that it has the right to purchase it and pass Captain Morgan on to Allied under their October agreement. Seagram and Diageo argue that the right to buy Captain Morgan applies only if it was being sold as a single brand, not as part of the disposal of the whole portfolio.

Allied has also been involved in the high-profile acquisition of two famous champagne houses, Mumm and Perrier-Jouet, in a deal worth about $500,000 (£342,000). And in November, it announced that it had secured a 10-year deal for the exclusive rights to distribute the Russian brand Stolichnaya in the US.

These major extensions to the Allied portfolio are symptomatic of a wider trend within the industry. Customers are moving away from cheaper drinks towards purchasing the well-known global brands. It is a sign of its success in this portfolio development that Allied has seen share prices jump from a dismal low of 260p last year to a current rate of 430p. Figures show that this, the first year since the divestment of its pub-chain, has been a successful year. Pre-tax profits for the year ending 31 August 2000 grew by 14 per cent from £362m to £413m and normalised earnings per share were up 13 per cent to 27.4p.

It has also been a year of decentralisation and globalisation for the company, working as far afield as Puerto Rico and Korea. This increasing concentration on international trade is reflected within the structure of Allied itself and it has witnessed immense change since Russell Kelley took over as general counsel and company secretary in January 2000.

The most dramatic of these changes for the in-house legal department is the globalisation of its outlook. Kelley says: “It has been a period of dynamic change for both the business and legal departments, but the biggest challenge for us was the creation of a global legal department. We had never acted as a team or global business before.”

The main benefit of no longer acting as individual entities was a sharing of expertise and experience between the different locations. Kelley says: “Spain and Mexico had never spoken to each other, even though they were dealing with much the same issues and use the same language. It’s a similar case with the UK and US. We needed to share best practice to ensure a higher quality legal service.”

Last June, Kelley organised the first ever meeting of the Allied legal department, in Bristol. The department is made up of 30 lawyers, 25 paralegals and 20 administrators, who are based in the US, the UK, Mexico, Spain, Canada, Brazil and Argentina. It deals with a range of diverse issues, from general corporate and commercial work to contracts, regulatory work, employment, intellectual property, trademarks, tax and dispute resolution. Despite this, a large amount of work is also outsourced.

Kelley says: “We look for outside assistance in projects which demand some specialised expertise, or, more occasionally, when additional resources are needed. We look particularly in the areas of M&A and litigation or when we need solicitors abroad, for example, if we needed a local expert in the Czech Republic. We operate in 10 times more countries than we have offices in – we don’t pretend to have the expertise to handle all the business issues that arise.”

Allied is a lucrative client for the firms it uses. In the UK, it outsources to firms such as Linklaters & Alliance, which played a leading role in the acquisition of the champagne businesses, Ashursts which deals with a significant amount of Allied’s competition work, and Osborne Clarke, which was instrumental in the outsourcing of IT support in Europe.

When Kelley took over from David Mitchell last year, there was speculation that he would cut the legal team and put together a new panel. Such speculation has been unfounded. In fact, the company has taken on two solicitors. Maria Every, its first general counsel for Europe, made the move to Allied from arch rival Diageo, while Charles Brown moved to the company from RMC Group. Allen & Overy associate Amanda Hamilton is also expected to join the team’s Bristol office in March. But Kelley says that he has found no need to change the staple firms. He says: “There have been no significant changes. We are happy with the service we get and are not interested in making changes for no reason.”

The company, which just last year relocated its head office from London to Bristol, also made a more ambitious move by launching a joint venture with alcoholic beverage manufacturer Jinro in Korea. This agreement established two new companies: Jinro Ballantine’s Company for the bottling, distribution, marketing and sale of Scotch whisky in Korea and Jinro Ballantine’s Import Company which is responsible for whisky bottled outside Korea. Allied took and retained a 70 per cent share of the companies, while Jinro owns a minority 30 per cent sharehold.

Kelley says: “It’s exciting if you look at the global nature of the transactions. Two champagne houses based in France, a strategic alliance with a Puerto Rican rum company and acquiring US distribution rights. It highlights the broad base of our business.”

Kelley hopes to build on the foundations set up this year, both in the business and its in-house legal department. He says: “We have made a number of changes, the Spanish legal department had previously been working only in Spain, but is now working throughout Europe. In the same way, Mexico is now working throughout Latin America. We have broadened their remits and hope to continue the decentralisation theme.

“We currently deal with Asia-Pacific legal issues in the UK, but Bristol is a long way from Singapore. We hope to see the business develop enough to permit a dedicated lawyer to go out there.”

Busy times are ahead and if market forecasts are correct then further sector consolidation is on the cards. The next few years could see the wine and spirit trade change beyond recognition, although if the last few months have set the tone, traditional rivalries within the industry seem set to remain.
Russell Kelley
Head of legal, general counsel and company secretary
Allied Domecq

Organisation Allied Domecq
Sector Wine and spirits
FTSE rating 67
Market capitalisation £4.6bn
Employees 10,000
Legal capability 30 lawyers and 25 paralegals worldwide
Head of legal, general counsel and company secretary Russell Kelley
Reporting to Chief executive Philip Bowman
Main location for lawyers Bristol
Main law firms Ashurst Morris Crisp, Bevan Ashford, Linklaters & Alliance and Osborne Clarke