City: Guinness marriage is heading for divorce

GUINNESS, Britain's largest drinks group, is so beset by stock market rumours these days that conventional wisdom would dictate at least one of them must be right. There are many permutations, but broadly they revolve around one central theme - that Guinness's key six-year relationship with Bernard Arnault of LVMH has hit the rocks.

At present, the two companies are bound together by 24 per cent cross-shareholdings and 16 international marketing and distribution joint ventures, the most recent of which is for China and was set up only last week. Over the years, the association has been a highly successful and beneficial one, but there is a growing feeling both among outside observers and Guinness insiders that it's approaching the end of its natural life.

That creates both opportunities and dangers for Guinness. There seems to be nothing imminent, though it's always possible Mr Arnault is holding something back - that he's got plans which are not known to Guinness. Nevertheless, there would be something seriously amiss if Guinness was not using the present uncertainty to study with its advisers how best to untangle the relationship in a way that strengthens its position.

When Guinness first announced its engagement to LVMH all those years ago, it seemed like a marriage made in heaven. Here were two luxury drinks companies - one British, one French - apparently eminently compatible. But as the years passed, the strategies of the two companies progressively diverged. Guinness has no interest in luggage and perfumes; beer is alien to LVMH. For Guinness, the final straw must have come with Mr Arnault's well-publicised ambitions to break into the French media, which he seems determined to pursue through LVMH rather than his own private family interests. Mr Arnault apparently also sold LVMH one of his privately owned perfume businesses recently, something that is said to have infuriated Guinness's chairman, Anthony Greener. You don't need much of an inside track to see that Guinness's and Mr Arnault's views on what should be happening at LVMH have become widely different.

So what to do? If the price was right, Mr Arnault would sell some or all of the LVMH stake in Guinness, but he wants pounds 5 a share and that's a non-starter for the time being. Ideally, Guinness would like to preserve its relationship with the LVMH cognac and champagne businesses. If it could strengthen those links by acquiring them or gaining more control, even better. Untangling the relationship in a way that will suit both sides will be difficult and complex, but surely not beyond the wit of clever, fee-hungry merchant bankers. There may be nothing imminent, but it can't be far off.