LVMH Gives OK to Guinness, GrandMet Merger

French luxury goods conglomerate LVMH Moet Hennessy Louis Vuitton on Monday unexpectedly ended its opposition to the $37.3-billion merger of Guinness and Grand Metropolitan after an agreement gave it control of most of the drinks distribution network of the new company plus a seat on the board and $812 million in cash and special dividends.

LVMH will now include GrandMet in its joint distribution network with Guinness and stop legal action that could have banned the merged company from major markets. This threat plus LVMH’s purchase of 11% of GrandMet brought the two British companies to the bargaining table and got LVMH a $375-million payment to “bury the hatchet,” LVMH Chairman Bernard Arnault said.

The agreement eliminates the hurdle to the merger, which will include the world’s biggest liquor business by sales--with brands such as Johnnie Walker and Gilbey’s--as well as Burger King restaurants, Pillsbury food and Guinness beer. Shares of all three companies surged as investors welcomed a quick end to what was seen as a long and costly legal battle.

“We didn’t expect a resolution so rapidly,” said Pierre-Romain Gorot, a fund manager at Jean-Pierre Pinatton, which has about $700 million under management. “It’s really great for the shares.”

American depositary receipts of GrandMet rose 75 cents to close at $39.75; Guinness ADRs surged $2.61 to $49.98; and ADRs of LVMH rose $1 to $42.75.

The British companies said in May they would combine to form GMG Brands, which would have a market capitalization of more than $35 billion. LVMH, Guinness’ biggest shareholder at the time with a 14% stake, would have been pushed to the sidelines by the move. Arnault proposed instead setting up a drinks company with all three companies’ brands, in which LVMH would have 35%, and spinning off the food and beer business.

“This is still a compromise where LVMH hasn’t really gotten everything it was betting on,” said Marc Renaud, a fund manager at CCR Actions in France.

However, some analysts said there’s still a chance GMG Brands could eventually be broken up into the separate drinks, prepared-foods and fast-food companies that LVMH wanted.

“That potential is still there, and I’m sure LVMH is fully aware of it,” said Cedric Magnelia, an analyst at Credit Suisse First Boston.

Arnault is expected to use his seat on GMG’s board to push the company to prove the merger is capable of creating the promised value for its shareholders. Arnault said GMG would need three years to achieve benefits from the merger.