LONDON If Diageo -- the world's biggest spirits company -- wants to be a leading player in American whiskey, the experience of another major company attempting a U.S. merger won't give it much cause for cheer.
Telecoms group AT&T (AT.N) is struggling to seal approval for its $39 billion takeover of T-Mobile USA and analysts see in AT&T's difficulties evidence of a tougher anti-trust stance from an administration increasingly sensitive about market share dominance and job cuts in a stagnant economy.
Insiders say Diageo (DGE.L) has been eyeing Beam BEAM.M, maker of Jim Beam and Maker's Mark bourbons, as a way of getting greater access to North American whiskies, the fastest-growing spirits category in the United States. Beam became a pure-play drinks group in October after it was spun out of Fortune Brands.
"The deal environment has changed with the (AT&T) mobile merger plan, and Diageo could well face an uphill task to convince U.S. regulators of the merits of a Beam takeover," said one investment banker with knowledge of the situation.
A deal, likely to be worth around $10 billion, would push Diageo's share of U.S. spirits' market above 30 percent. It already has a quarter of the market -- nearly three times that of its nearest competitors, Beam and Bacardi.
AT&T's plan to buy Deutsche Telekom's (DTEGn.DE) T-Mobile unit in the United States ran into opposition in August from regulators who said combining the second and fourth largest U.S. mobile phone operators would hurt competition.
The proposed acquisition would create a new dominant player in the U.S. mobile market, leapfrogging Verizon Wireless and leaving No 3 player Sprint Nextel (S.N) trailing in their wake.
"The AT&T move would create a virtual duopoly in the U.S. mobile phone market, so it is not difficult to understand that regulators would look very carefully at the two biggest spirits players getting together," said another banker.
Though Diageo has declined comment on any deal plans, analysts have widely flagged world no 4 spirits group Beam as a potential target for a breakup bid -- one in which only parts of the business are retained by the buyer and the rest sold off, often to address competition concerns.
Diageo's financial strength makes it the favorite to lead a bid: it had relatively low net borrowing of 8.4 billion pounds at end-September 2011 compared to the group's market value of 34 billion pounds and Diageo Chief Executive Paul Walsh has said the group has the balance sheet strength to look at purchases.
It also lacks big names in U.S. whiskey. Beam owns bourbon brands Jim Beam, the country's top-selling bourbon, and Maker's Mark, one of the top six best-selling U.S. whiskies.
Increasingly popular as an ingredient in cocktails and with the exports market, North American whiskies were the fastest growing spirit category in the region in the year to end-October.
DITCH THE TEQUILA
Bankers say if Diageo bids for Beam it would not be allowed to keep Beam's Sauza tequila, Courvoisier cognac or Teacher's scotch whisky because of brand overlaps.
But ditching these may not be enough to satisfy regulators in the current climate. Retaining Jim Beam and Maker's Mark alone would give Diageo a 44 percent share of the U.S. whiskey market from 13 percent at present.
Diageo, whose own brands include Smirnoff vodka and Captain Morgan rum, is already the largest spirits player in the United States. Any big increase in market share could set alarm bells ringing in the White House.
Among Diageo's rivals, privately-owned Bacardi and Beam have around a 10 percent share each of the U.S. spirits market, while Pernod Ricard (PERP.PA) and Jack Daniel's maker Brown-Forman (BFb.N) hold just under 10 percent.
"We have seen big drink deals done under a Republican administration in the last ten years such as the breakup of Seagram and Allied Domecq and the bringing together of MillerCoors, but deals could be a little more difficult under the Democrats," said another banker.
Regulators can technically only block deals on competition grounds, but high unemployment and risks to the U.S. economy from turmoil in the euro zone may make them less keen to push through deals that could lead to job cuts, bankers say.
Though the U.S. economy is expanding moderately despite a slowing world economy, unemployment remains high and the housing market depressed.
Because of anti-trust concerns, both of the big U.S. spirit deals in the last decade were breakup bids. Diageo and Pernod carved up Seagram between them in 2001 for $8.15 billion, while Pernod and Fortune split up Allied Domecq in 2005 for 7.4 billion pounds.
In 2008, the second and third biggest brewers in the United States merged to form MillerCoors.
North America is the biggest profit centre for both Diageo and Beam. Diageo makes 41 percent of its profits there and Beam well over 50 percent.
Diageo's Chief Executive Walsh has declined to comment directly on Beam. Although the U.S. whiskey brands are attractive he is believed to have some concerns that Beam still has a number of smaller brands which Diageo would not want.
Analysts say the move would be good for Diageo if it could appease the regulator over market share concern.
"If Diageo indeed wants to be No 1 in every category they compete in, we think M&A will be needed if it wants to beef up its presence in North American whiskies," said Liberum Capital analyst Pablo Zuanic.
If Diageo is put off from leading a breakup bid it could open the way for Pernod to do so, with a partner, once the French group has paid down the hefty debt it took on buying Absolut vodka group Vin & Sprit in 2008 for 5.7 billion euros.
(Editing by Jodie Ginsberg)