France casts doubt on Guinness merger

The pounds 23bn proposed merger between Guinness and Grand Met is about to face a new obstacle from the French authorities, which are worried that control of the global distribution of champagne is falling into British hands.

From the French point of view the proposed formation of GMG Brands is not about Scotch or stout, but about the world distribution of champagne. According to international trade sources, the French government is preparing to lobby Brussels when the latter examines the proposed merger.

One source says: "There is no way the French establishment is going to allow the entire future of the French champagne industry to be agreed by a bunch of pin-striped rosbifs in London's merchant banking parlours."

Guinness already has an exclusive world distribution deal with the world's biggest (by bottleage) champagne company, Moet Hennessy. At stake, therefore, is the world's biggest-selling brand, Moet et Chandon, as well as the company's other brands - Veuve Clicquot, Dom Perignon, Mercier, Pommery and Canard Duchene.

Guinness owns 34 per cent of Moet Hennessy while the French luxury goods group LVMH, headed by Bernard Arnault, owns the rest. Mr Arnault is also the largest single investor in Guinness with 14.2 per cent of the stock. He also sits on the Guinness board.

The French establishment is concerned about how influence over the distribution of champagne will change following the merger. Moet Hennessy is locked into an exclusive global deal with GMG Brands under the terms of the merger, and Mr Arnault's stake in Guinness will be diluted to just 7 per cent.

"He will change from being one of the most important shareholders in Guinness to just another portfolio investor," says one observer.

Meanwhile GMG Brands will sell Moet Hennessy's champagne through the world's biggest drinks sales network, which will include joint ventures in the US, Japan, Thailand, Singapore, South America and Western Europe.

Mr Arnault has already voted against the deal and proposed an alternative - the creation of a single company combining the drinks sides of GrandMet, Guinness and Moet Hennessy. This company would be floated off.

This plan has got nowhere so far, and the French authorities are concerned that the creation of GMG Brands will leave the majority of French champagne being distributed by a British company, with Mr Arnault left on the sidelines despite his majority ownership of LVMH.

The Brussels authorities are expected to start inviting formal submissions on the proposed merger within a fortnight.

Suggestions that the French might intervene over the champagne issue drew a dismissive response from Guinness/GrandMet. The American drinks group Seagram and Allied Domecq are both expected to make representations to Brussels, and sources suggest they may be used as "stalking horses" by the French authorities casting doubts on the deal.

A spokesman for Guinness/GrandMet rejected fears on the champagne front.

"There is no sovereignty issue," he said. "French champagne producers will get even better distribution around the world [through GMG Brands], which is what Mr Arnault wants anyway. The champagne companies do remain absolutely under French control."

The spokesman also denied reports that the companies would have to sell off drinks brands such as VAT 69 or Dewar's.