Bass holds talks with DTI over Carlsberg merger

Bass and Carlsberg Tetley are holding fresh talks with the Department of Trade and Industry in an attempt to overcome the seemingly insurmountable monopoly problems of merging their brewing interests. According to sources, representatives from both sides held talks with the DTI towards the end of last week and more talks were planned for this week.

The DTI is understood to be driving a hard bargain before sanctioning the deal that will create the UK's biggest brewer, particularly in the light of the recent ditching of the Government's "big is beautiful" philosophy when PowerGen's and National Power's separate takeover bids for regional electricity companies were blocked.

Many drinks analysts at City broking houses have become increasingly sceptical about the chances of the merger being consummated following the Government's surprise blocking manoeuvre in the electricity sector. Some also believe that Bass may be trying to push too hard a bargain, a tactic that could force Allied Domecq, owner of a half-share in Carlsberg Tetley, to walk away from the negotiating table.

"The jungle drums have been very quiet in the City lately," one analyst said yesterday. However, he still believed that Bass remained keen to reclaim pole position in UK brewing following its relegation to second place last summer when Scottish & Newcastle Breweries bought Courage.

The principal stumbling block for the Bass deal with Allied - apart from any disagreement over price - is the pocket of regional monopolies in the Midlands and the North that a straight merger would yield. In some cases, Bass, assuming it buys Allied out of Carlsberg Tetley, would hold sway over market shares as high as 70 per cent in some areas.

Additionally, some competitors have privately expressed deep concern about the national market share of close to 40 per cent that a combined Bass and Carlsberg Tetley brewing operation would have.

To overcome the problem, some analysts believe that Bass will have to relinquish some of its control over the pub market, possibly by hiving off its 1,400-strong tenanted pub estate - which equates to a near-2 per cent market share.

Bass would also be able to claim that it does not have control over several beer brands it produces under licence, which would further reduce its stated market share by around another 5 percentage points.

Another prime problem is placating the Danish owners of Carlsberg who, according to sources close to the company, do not relish the prospect of becoming a bit player in the UK, a market that accounts for a large part of its sales and generates north of 10 per cent of its profits.

Relationships between Allied and Carlsberg have been far from sweetness and light since Carlsberg Tetley was formed more than four years ago. "The cultural differences have been big," one industry observer said.

Carlsberg needs reassurance about supply deals for its own beers because it does not own any pubs. One analyst said that to ensure it was not cast adrift, Carlsberg would need to have a reasonable minority say of between 15 and 20 per cent of an enlarged Bass brewing empire.

Separately, Allied Domecq, which has suffered a series of unrelated setbacks in the last couple of years, will have to show a restless City audience that it has the ability to strike a good deal for investors.

Accepting anything less than pounds 250m for its stake, say some observers, will raise eyebrows in the City and may well lead to an investor-led backlash against senior management at Allied, which is led by Sir Christopher Hogg, who recently took over the chairmanship from Michael Jackaman, and Tony Hales, chief executive.