Not so tranquil now

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THE image is picture postcard Scotland: the 16 men of Tain crafting whisky in the time-honoured way in the Glen of Tranquility. In reality, most of Glenmorangie’s employees work next to a huge shale bing near Broxburn, West Lothian. The company is a lean, slick, international operation with little room for sentimentality.

However, whisky has a special place in corporate hearts and the decision last week by the Macdonald family to put its 52% stake up for sale sparked worldwide interest, not least because it represents the best opportunity to acquire a top-selling malt whisky since Edrington bought Highland Distillers, owner of the Macallan and Highland Park brands, in 1999.

So far, one definite bidder has emerged - Brown-Forman, the producer of Jack Daniel’s. Bacardi, which already distributes Glenmorangie, is seen as the second-most likely to acquire it. Allied Domecq, the international drinks group which is considered weak in malt whisky, and Moet Hennessy, better known for its champagne and brandies, are all regarded as possible runners.

Some may be put off by the price. Last week’s announcement sent the company’s share price up by 36% to value the business at almost 250m - on the heavy side for a company with annual profits of just 9.6m. Analysts have talked about a possible value of more than 300m, based on the amount Edrington paid for the Macallan.

But Dominic Roskrow, the editor of Whisky Magazine, believes the price is unlikely to go much higher. He said: "The company is probably overvalued. There is a view that the Macdonalds would never get more money than they could get now."

Some savings could be made on distribution but Glenmorangie already uses Brown-Forman and Bacardi to move its products around the world.

To justify a 300m-plus price tag, a buyer would need to increase sales significantly. And that would require even more investment. One senior whisky industry source said: "To build the Glenmorangie brand globally, you have to look at stock availability.

"How much do they have in reserve? And then what sort of international distribution network do they have in place?

"Glenmorangie is very popular in the UK and Brown-Forman is strong in the US, but you need a network in other countries. In order to compete with Glenfiddich, a new owner would have invest at least 10m a year."

The Macdonald family is understood to be keen for the group to stay together once it is sold. The package includes the Ardbeg distillery on Islay, Glen Moray on Speyside, Glenmorangie in Easter Ross and the bottling and blending facility and headquarters building near Broxburn. It also includes the niche blended whisky Bailie Nicol Jarvie, and Highland Queen, which is popular in Australia and Venezuela.

Under one scenario suggested by Roskrow, Allied Domecq, which lacks a big name malt, would buy Glenmorangie for its flagship brand. It could then sell Ardbeg, which it sold to Glenmorangie a few years ago, because it already makes the similar malt Laphroaig on Islay.

Powerful, peaty malts from the south coast of Islay are fashionable at the moment and Ardbeg is considered the greatest of them all, so it could attract interest from a group such as Pernod Ricard or Whyte and Mackay.

The Macdonald family’s decision to sell comes at a time when the world’s thirst for malt whiskies looks unstoppable. Last year exports of bottled malts grew by 13.5% in value, breaking through the 300m barrier for the first time. Sales of bottled blends, a much larger category, rose by a more modest 3.5%, according to the Scotch Whisky Association.

At the same time, international tastes are converging on the big names. Sales of the top 10 brands - including Glenmorangie - grew three times as fast as the rest of the malt market in 2002, according to Impact, the drinks industry bible.

Alan Gray, a whisky analyst at Sutherlands, the Edinburgh stockbroker, said last week: "Single malts are becoming more popular. In new markets blends are the big sellers, but after a time the market matures and people think they know a little about whisky and move towards the premium blends and single malts."

Suddenly, it seems, everybody wants to make malt whisky. Mothballed distilleries such as Bruichladdich on Islay and Tullibardine in Perthshire are being reopened. New distilleries have been built on Arran, on Shetland, in Fife, and one has even been proposed for Barra in the outer Hebrides.

The big boys are also keen to get involved. Allied Domecq is cranking up production at its Scapa distillery on Orkney. Pernod Ricard is spending 6m to relaunch its Glenlivet brand and has set its sights on overtaking the world’s number one malt, Glenfiddich. That is a tall order given that Glenfiddich, owned by William Grant & Sons, sells twice as much, but Glenlivet will trade on the fact that it was the first legally distilled malt.

Whyte and Mackay has promised to dedicate more of its 50m relaunch marketing budget to its top malt brands, Dalmore and Isle of Jura. And Ian MacLeod Distillers, Glenmorangie’s neighbour in Broxburn, plans to double production of its newly acquired Glengoyne malt in an effort to push it into the global top 10.

Industry insiders expect Diageo to come out with a blockbuster product within the next 12 months. The group tried to change the formula for its Cardhu brand last year from a single malt (the product of one distillery) to a vatted malt (the product of a number of distilleries), while retaining the same name. Diageo lost after a bruising battle with William Grant, but is thought to be working on a new vatted malt brand. With the world’s biggest drinks company behind it, such a product could turn the sector upside down.

Single malt whiskies are limited in the rate at which they can grow because they rely on stocks which have been laid down at the site eight, 10 or more years before. A vatted malt can use whisky from anywhere in Scotland, turning excess stocks from unfashionable or neglected distilleries into valuable assets.

Roskrow said: "For all the critics have said, this vatted malt will be very exciting for the sector. I would expect to see a big battle between Diageo and Glenfiddich, while Glenlivet will want to be up there too."

So it looks like there will be a lot more malt whisky on sale over the next few years. That is not necessarily a good thing.

In any industry, oversupply leads to price reductions and pressure on profit margins. If the amount of malt whisky produced increases by 10% a year, but demand only increases by 5%, the industry will be left with excess stock.

Lower prices could prove particularly bad for malt whisky, which thrives on its exclusive, hand-crafted image. If supply continues to outstrip demand, low-profile distilleries will either close or be sold off to small-time operators who like the idea of owning one of Scotland’s 100-or-so malt whiskies.

Despite its upmarket image, Glenmorangie is no stranger to price cutting. The company’s ‘third’ malt brand, Glen Moray, could be picked up last Christmas for 13 a bottle, not much more than the price of a premium blend.

Glenmorangie is also one of the biggest suppliers of own-label whisky to supermarkets. The own-label business is underperforming the rest of the group, and other distillers say privately that low prices charged by the likes of Glenmorangie undermine the prestige and profitability of the entire sector.

At the same time, the group has been willing to innovate with premium products such as Glenmorangie with a choice of port, sherry, madeira or burgundy finishes.

Glenmorangie and Ardbeg will undoubtedly thrive as the UK’s top selling malt and the strongest tasting, most pungent Scotch whisky respectively. Whoever buys the company may follow the example of Vivian Imerman at Whyte and Mackay by concentrating on profitable brands at the expense of supermarket products.

But one industry insider said: "It is hard to justify the kind of prices that are being talked about. It could be that owning a whisky will be a prestige thing, like owning a football club. But the money has to come from somewhere."

With excellent timing, Glasgow will host one of the biggest shows in the whisky industry calendar next month. Whisky Live will play host to Glenmorangie and 29 other exhibitors - including John Dewar & Sons, subsidiary of its likely suitor Bacardi. Allied Domecq will also be there - and some may note the gap in its portfolio for a big Highland malt whisky. Other notable players at the George Square shindig will include William Grant & Sons, the industry’s self-appointed watchdog, and Diageo, still licking its wounds from the battle over Cardhu. It should be some party.

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