The Spinster and the Billionaire: Allied Domecq's Surprise Suitor

But Buffett isn't the only one wooing the world's most undervalued spirits company.
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After years of languishing in self-imposed celibacy,

Allied Domecq

(ALDCY:OTC BB) -- the wallflower of the global spirits business -- has suddenly become the ravishing

ingenue

, attracting the attention of no less than three highly eligible suitors. The most famous of course, is

Warren Buffett

, the plain-spoken Nebraskan who has made one of the world's great fortunes from his ability to spot undervalued brands.

But Buffett's attentions have been followed by a far less gentlemanly rivalry between competing suitors. One is British brewer

Whitbread PLC

, Allied's current partner in the drinks business. But then along came

Punch Taverns

, which looked a loser until the surprise announcement that its new majority owners were the

Texas-Pacific Group

, the aggressive Ft. Worth-based buyout firm. All of a sudden the markets are eyeing the contest between Allied's bespoke partner and the latter-day pirate and placing big bets on just who will waltz off with the prize. Other anxious suitors may also include brewing giant

Bass

, and an arm of Japanese financial titan

Nomura Securities

, which, of all things, is a major owner of pubs in the U.K.

The news of the three-way tussle has been a welcome change for long-suffering Allied shareholders. Despite its relative obscurity, Allied is the third-largest global spirits company, behind the U.K.'s

Diageo

(DEO) - Get Report

and

Seagram

(VO) - Get Report

. They've watched the shares languish pretty much since October 1992, when the shares first started trading in the U.S. at 9 7/8. By last October, the stock bottomed out at 6 5/8, and soon after, Drinks & Diversions wrote about the company's

efforts to reshuffle its U.S. units.

Things hadn't improved much by May 3, when the company finally announced that it was in talks to sell its pub and soft drink operations to Whitbread. The offer was for 2.3 billion pounds, or $3.7 billion, for Allied's 3,500 pubs, a 25% stake in the Britannia soft drinks business, and Allied's half-stake in the First Quench retail drinks chain that it operates with none other than Whitbread. The whole operation would be a nice complement to Whitbread's own ale and pub business, even though British antitrust laws will require it to divest its brewing operation if it acquires the pubs.

But no sooner had Allied announced Whitbread's offer when along came another local Lothario, privately owned Punch Taverns, which figured the drinks business was worth more like $4.26 billion. Allied, however, refused to discuss Punch's substantially sweeter proposal. So, on May 10, Punch, which owns 1,500 pubs of its own, began lobbying Allied's largest shareholders.

D&D's sources in The City said that Allied's rebuff was based partly on its working agreement that locks out other players until Whitbread finalizes its offer. But the other reason is skepticism that Punch could come up with the quid to back up its bid.

That last concern was let out to pasture on May 19 with the news that Texas-Pacific Group -- known for its control of both

Continental Airlines

(CALA) - Get Report

and

Beringer Wine Estates

(BERW)

-- had bought a controlling interest in Punch. Whitbread was expected to finalize its offer this week, thus clearing the way for a bidding war that could only enrich Allied and its shareholders. Texas-Pacific officials had no comment to make for this article.

There's no mystery what initially attracted Buffett, who had purchased his 2.2% Allied stake as early as April 19: Allied was an undervalued company with well-known brands that have strong market share. Once the pubs are married off on their own, Allied will still own global brand powers like

Kahlua, Ballantine's

Scotch,

Canadian Club

whiskey,

Beefeater

gin and

Sauza

tequila, along with

Baskin-Robbins, Dunkin' Donuts

and

Togo's

eateries.

Among spirits brands selling for more than $10 a bottle, the company's Canadian Club is the No. 9 brand in the U.S., Kahula is No. 14 and Beefeater, No. 19. But the market is supremely fractured one -- in which Canadian Club, for example, can make the top-10 list with a market share of just 1.1%. Indeed, the key rationale for Allied to spin off its nonspirits businesses is to raise the cash and sharpen the focus to claw its way up in market share.

On a business trip to the U.K. in mid-April, Buffett told analysts in The City that he felt the U.S. market as a whole was overvalued and that he was looking at investing in a then-undisclosed U.K. concern. For its part, Texas-Pacific -- which also likes to fish just a few inches off the bottom -- opened a London office about a year ago and has done six deals so far, not counting the Punch takeover.

The sale of the pubs business would allow Allied to focus on drinks and fast foods, but there are also rumors of a management buyout of Dunkin Donuts and Baskin-Robbins. Allied had a firm "no comment" on this and other questions regarding the spinoff, but sources in The City said managers at those units are quietly inquiring about funding.

Whatever the outcome, it's clear that life is looking awfully sweet for Allied, which has languished in the shadow of much-bigger rival Diageo, ever since that company was formed by the 1997 merger of Grand Metropolitan PLC and Guinness. It was that merger, in fact, that led Allied to grow increasingly desperate for a connubial coupling of its own.

But the underperforming conglomerate received a steady stream of rejections, including a highly prominent one from Seagram that D&D

described in December. So it's clear that the former wallflower is enjoying her day in the sun. And while nobody knows exactly who's going to wind up in bed with whom, it is clear that Allied Domecq -- and her investors -- will end up with a fair piece of change and their last opportunity to really make a mark in the global spirits biz.

Lewis Perdue is editor and publisher of

Wine Investment News. While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at

lperdue@ideaworx.com.