Rating controversy over Allied

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The power struggle over UK drinks manufacturer Allied Domecq took some unexpected twists in April. Though many expect a bid for Allied to be successfully completed, the market reacted with bemusement to Fitch’s downgrade of the company, and a number of other firms threw their bids into the hat, leaving bondholders uncertain of what will happen to their holdings.

Currently, Pernod Ricard is in the driving seat, having posted a £7.4 billion bid, though counter bids are expected from a consortium including winemaker Constellation Brands, private equity firm Blackstone Group and potentially drinks conglomerate Diageo.

It was Pernod’s bid and questions over the seniority of the firm’s €9 billion euro bank acquisition facility that prompted Fitch’s two-notch downgrade to BB+ on April 21. “The rating downgrade had assumed that Pernod’s acquisition facility would take security over the group’s, including Allied’s, brands,” says Frederic Gits, analyst at Fitch, in a statement.

But this was not the only surprising action from the rating agency. Just a day later, Fitch changed the outlook on Allied Domecq to evolving from negative. “Although Pernod has confirmed that the facility is unsecured, Fitch still believes that such acquisition funding could subordinate Allied bondholders depending on the final details of this funding,” adds Gits.

One credit analyst at a London-based investment bank believes that Fitch has been left with egg on its face after its actions. In contrast, Moody’s and Standard & Poor’s decided to place the company on review for downgrade, stating that they would hold talks with the company before making a firmer decision.

Stephanie Foster, consumers analyst at Dresdner Kleinwort Wasserstein, believes that Pernod looks more likely to prevail with its bid. “The company stands to gain the most, primarily synergies of €300 million which are unlikely to be realised with the Constellation Brands consortium, which is made up of four different players,” she says.

One question on many a bondholder’s lips is what Allied’s rating would become after an acquisition (Pernod is unrated). Foster suggests that if the same analysis was applied as in the case of Imperial Tobacco’s acquisition of Reemstma in 2002, Allied’s ratings should remain in the investment-grade bracket.

“Allied’s business profile is investment grade as it is a strong cash-generative, non-cyclical industry, but the financials will initially be weak. Imperial was left investment grade pending restoration of its balance sheet and the same could apply here,” she says.