US blocks $8bn Seagram deal

US authorities have called time on the Seagram deal

US competition authorities have blocked the $8.15bn sale of Seagram's wines and spirits empire to Britain's Diageo and France's Pernod Ricard.

The Federal Trade Commission (FTC) ruling represented a blow to Diageo, which was hoping to extend its dominance of the global spirits market.

But the British company said on Wednesday it was "encouraged" by the commission's willingness to pursue further discussions over the trade bar.

And the firm was cheered by a separate FTC ruling, also announced on Tuesday, giving the go-ahead to General Mills' $5.36bn purchase of its Pillsbury unit.

Diageo has been attempting to spin off Pillsbury for some time, amid worsening conditions in its core US food market.

"[The move] represents a major step in Diageo's strategy of focusing on its premium drinks business," chief executive Paul Walsh said on Wednesday.

For General Mills, the deal lead to a large increase of sales, and give it control of the world-famous "Pillsbury dough boy" brand.

Leonid Teitlebaum, a food analyst with Merrill Lynch, said: "The Pillsbury brands really take General Mills into other areas of the grocery store."

Bigger blow for Pernod

Diageo, which also owns Burger King and Guinness, is in the process of re-focusing its business on its core spirits brands, which include Smirnoff vodka, Gordon's gin and Johnnie Walker whisky.

The Seagram deal would have added Captain Morgan rum and several lesser known brands to the Diageo portfolio.

But analysts said the FTC's ruling will be more of a blow to Pernod, which was to have landed Chivas Regal whisky, as part of its $3.15bn share of the deal.

The French company was hoping to catapult itself from fifth to third in the global spirits stakes, with a 20-25% increase in turnover.

Industry insiders say the stumbling block for the FTC was Diageo's potential dominance of the US rum market.

At odds with Europe

Seagram was a Canadian company before its takeover by Vivendi Universal, which kept the entertainment assets but proposed selling off the wine and spirits business to Diageo and Pernod Ricard in the deal announced last December.

We're encouraged by the FTC's willingness to have further discussions which we will pursue over the coming weeks

Paul Walsh, Diageo chief executive

The FTC's decision to block the deal puts it at odds with European competition chiefs, who approved the sale in May.

Both Diageo and Pernod, which beat a Bacardi-led consortium to land the Seagram portfolio, said they would continue talking to the FTC with a view to reaching a resolution.

Still confident of a deal

Pernod said it was still confident of agreement on the deal which would see it challenging Allied Domecq for second place in the global spirits stakes.

Chairman Patrick Ricard said: "We are disappointed by the result at the FTC but we remain confident that this transaction will be brought to a successful conclusion."

In the City, Andrew Gowan, beverage sector analyst at Lehman Brothers, said: "The devil is definitely in the detail, and by definition they will have to make concessions."

'Reduced competition'

In a statement, the FTC said Seagram was the second biggest seller of rum in the US with its Captain Morgan brand and Diageo was third placed with its brands including Malibu.

The merger would turn the US rum market for rum into a duopoly controlled by industry leader Bacardi and Diageo/Seagram, the FTC said.

"This will create a dangerous likelihood of reduced competition and higher prices for consumers of rum," FTC competition chief Joe Simons said.

Industry insiders said Diageo had offered to sell the Myers Rum brand to soothe the US FTC's competition concerns but the agency's staff had concluded it was not enough.

Diageo has been told it will have to sell its Gibson's finest whisky brand as a condition of its acquisition of Seagram's brands in Canada.

In the City, Diageo shares stood 2p higher at 685p at 0900 GMT.