Protection on drinks company Allied Domecq tightened by 30 basis points last week after an acquisition offer by French company Pernod Ricard was backed by market leader Diageo. Traders said the offer is a less leveraged deal than a rival bid from Constellation Brands and the price of credit protection fell sharply because the Pernod offer appears more likely to succeed. Spreads on credit-default swaps referenced to Allied moved in from 130-140bps on June 2 to 100-110bps on Thursday.
Credit spreads on the name blew out last month when rumors circulated Diageo had in fact put its weight behind Constellation, which has teamed up with the maker of Jack Daniel's bourbon Brown-Forman Corporation and two private equity groups in preparation for a likely bid. Traders said the Constellation bid was heavily debt financed and spreads widened when the market reacted to the possibility Allied bonds would be weakened in a takeover.
Fitch Ratings downgraded Allied from BBB to BB plus in April when news of Pernod's offer emerged. Frederic Gits, European drinks analyst at Fitch in Paris, said the rating is being monitored pending completion of the bid and announcement of its final characteristics. "The position of Allied bond holders under Pernod would be highly leveraged but should Constellation win the day it is likely to be even worse," he said.
Standard and Poor's rates Allied BBB plus and Moody's Investors Service gives the company a Baa1 rating and has placed it on watch for possible downgrade.
