Deal could bring new surge in whiskey sales, says Jane O'Sullivan, Markets Correspondent.

Pernod Ricard took many people by surprise when it announced on Monday that it had agreed to sell its Bushmills Irish whiskey brand to arch rival Diageo.

The French group's decision to sell its Number Two Irish whiskey to a company with the marketing might to make Bushmills a serious challenger to Pernod's top brand, Jameson, might seem at first sight a strange one.

But viewed as part of a wider picture, it makes more sense.

The prize for Pernod was to take Diageo out of the running in the race for control of Allied Domecq. The price to be paid was Bushmills, which has long played second fiddle in the Pernod portfolio to Jameson.

The €295 million (£200 million) price tag attaching to the Co Antrim-based distillery confirmed for some that there were other factors at play in this deal, which is conditional upon Pernod securing control of Allied Domecq.

While the price represents 14 times Bushmills' €21 million contribution to Pernod's coffers last year, one industry source noted that LVMH paid a broadly similar multiple for Glenmorangie, a less prestigious brand, last autumn.

"It's not an exceptional price for a premium brand," he said, while another industry player noted Pernod might have got more at auction.

To many observers, the trade-off seems simple. In return for allowing Pernod a clear run at Allied Domecq, Diageo has succeeded in loosening the French group's stranglehold on what is now the fastest growing brown spirit in the world.

In acquiring control of Bushmills, it gets its hands on the world's oldest licensed whiskey distillery and a 400-year-old brand, well-established but in need of some nurture.

Since its 1988 acquisition of Irish Distillers Group, and its stable of whiskeys, Pernod has focused its energies on establishing Jameson as the internationally-recognised Irish whiskey brand.

Industry sources credit the company with moving whiskey from being merely an Irish coffee ingredient in many parts of the world to a drinks category in its own right. The marketing and distribution drive Pernod has thrown behind Jameson has seen sales of the brand rise from 400,000 cases in 1988 to 1.75 million last year while it now has two million cases in its sights.

In its wake, many others have followed, including the C&C-owned Tullamore Dew, which sold 430,000 cases last year, Pernod's smaller brands Paddy and Powers, and smaller whiskeys such as the Kilbeggan, Tyrconnell and Connemara brands made by the independent Cooley Distillery.

But while Jameson, which is now one of the top spirits brands in the world, has been powering ahead, enjoying double digit growth rates in the important US market, Bushmills' performance has been more modest. With sales of around 450,000 cases annually, industry sources describe it as a two-market product.

Aside from dominating its local market in Northern Ireland, where it has a 50 per cent market share, the US has been the other main market for the brand with growth in the 2 to 4 per cent range.

Diageo, however, has the capability, to seriously expand Bushmills' geographic spread.

"They have got the distribution network to leverage Bushmills," said one source with experience of the international whisky industry.

"Through the Guinness link, they also have good control of Irish bars and an immediate in through their Guinness sales teams."

As a consequence, industry insiders believe Diageo has the capacity to grow Bushmills sales by as much as 50 per cent in the first year alone.

But rather than feeling threatened by the might of Diageo's marketing machine being brought to bear in their sector, the move has been welcomed by other players in the industry.

With sales of Irish whiskey at just four million cases annually, as against 90 million for rival Scotch, the opportunity for expansion is significant and the presence of another international drinks heavyweight spending up to 20 per cent of product revenue on marketing is generally regarded as a good thing.

"We're delighted," said Dr John Teeling, executive chairman of Cooley, the independent distillery he founded in Co Louth in 1987. "Anything that gets the Irish story out there is good. Irish whiskey has barely touched a lot of the world and Diageo will do that."

Aside from the lucrative US market, which is set to overtake the Republic as the world's largest market for Irish whiskey by the end of next year, industry analysts see significant potential in markets like Spain, Japan, South Africa, Latin America and Russia, a market where Pernod has been doing a lot of work.

Meanwhile, the deal throws up a number of other interesting questions.

The Bushmills distillery provided the malt for Pernod's other brands, raising the question of where Pernod will now get its malt.

Equally, under Diageo, Bushmills will be without access to Pernod's Midleton-based grain distillery for the product needed to make its blended whiskey.

Diageo declined to comment on any aspect of the deal, citing confidentiality agreements with Pernod. But a Pernod spokesman told The Irish Times that while there was as yet no supply agreement, one would have to be hammered out "in due course".

"It is in the interests of both companies to reach agreement because, as is common in the industry, malts and grains distilled by one company are supplied to others for making blended whiskeys, as in Scotland," he said.

But there has been speculation that if Diageo is successful with Bushmills, it may have to increase capacity at its Northern Irish facility which could see it build a grain distillery.

"You could yet see Pernod building a malt distillery in Midleton and Bushmills a grain distillery," one source said.

Industry observers will also be curious to see what happens to the supply agreements for cream liqueurs. At present, Pernod supplies the whiskey used by Diageo to make the top selling Baileys.

Meanwhile, what Diageo will do with Bushmills' own cream liqueur, launched just last year but which will now be competing against Baileys, remains to be seen. Bushmills also supplies the Kerry Group-owned St Brendan's brand.

Finally, with both Diageo and Pernod focusing increased attention on the Irish whiskey category, other major players are likely to feel the gap in their portfolios, possibly throwing up opportunities for some of the smaller producers.

C&C, which is already looking at putting in place new distribution arrangements for Tullamore Dew in the event that Pernod's bid to take over Allied Domecq succeeds, is likely to find no shortage of interested parties.

Dr Teeling also remains interested in strategic alliances or joint ventures to develop his brands and improve their route to the growing international market.

"Keep the spirit Irish", was the slogan trotted out during the 1988 takeover battle for control of Irish Distillers between Pernod and Grand Met.

These days, "take the spirit global" seems more apt.