DIAGEO has offered to offload the bulk of the Whyte & Mackay business to ease competition concerns, causing further uncertainty for around 485 whisky workers in Scotland.
The Office of Fair Trading (OFT) is considering the remedy after its probe into a £344 million deal, which gave Diageo a 25% interest in United Spirits - owner of Whyte & Mackay - in July.
A key driver for Diageo was to gain access to India's burgeoning spirits market but the deal also had major ramifications for the UK, as it put two of the top five blended Scotch brands in the same stable.
The OFT said the merger of Bell's - the Diageo brand that vies with The Famous Grouse for the number one slot - and Whyte & Mackay's eponymous blend would reduce competition in the supply of blended whisky. It said that would lead to higher prices for retailers and ultimately consumers.
It also judged that rival producers would not have the capacity to offset the resultant reduction in competition in the market.
Now the watchdog is considering a remedy from Diageo that would see the spirits giant offload most of the Whyte & Mackay operation, including its eponymous brands, a private label business, its central operations and distilleries in Invergordon, Jura and Fettercairn.
Only the distilleries at Dalmore and Tamnavulin, including the brands, assets, staff and inventories at each site, would be retained by United Spirits Limited under the proposal. Those distilleries primarily serve markets overseas.
The OFT has suspended its duty to refer its report to the Competition Commission while it considers the offer. If it accepts the remedy, it would kick-start an auction for a business that, reports suggest, could be worth in the region of £1 billion.
Alan Gray, whisky analyst at Sutherlands Edinburgh and author of the Scotch Whisky Review, said the OFT's ruling would influence which companies bid.
Mr Gray said: "If the OFT turns that [Diageo remedy] down and says you have got to get rid of everything - and I am not saying they will - then you certainly have a very attractive package of four malt distilleries with the brands, a grain distillery a bottling plant and a whole lot of other brands, including Vladivar vodka.
"Now that, I think, would be attractive to quite a few players and that would include Brown-Forman of America, Bacardi which already has a presence in the whisky market through the Dewar's brand, and then you would have private equity groups.
"Whisky is going through a good patch and a lot of foreign investors are getting involved in Scotch whisky or buying individual distilleries if they can.
"There are not too many distilleries available at the moment: a few years ago you could have picked up some. Now there are not very many and capacity is being increased at a lot of them."
Suntory, the Japanese owner of Morrison Bowmore, has also been mentioned as a potential suitor. But Mr Gray said players such as Suntory and Pernod Ricard would be more interested in picking up one or two of the Whyte & Mackay malt brands.
Diageo said the OFT was considering its proposal and that further details on the plan, which will be subject to a formal consultation, will be announced soon.
It added: "Diageo will be assisting the OFT with its ongoing work. A further announcement will be made in due course and we are not in a position to comment further at this stage."
Chris Walters, chief economist at the OFT on this case, said: "These companies are two of the leading suppliers of blended bottle whisky in the UK, especially to supermarkets and other large retailers.
"Our investigation considered a wide range of evidence and we concluded that the likely loss of competition could give rise to higher prices for retailers, and ultimately consumers.
"We are now considering Diageo's offer to sell the bulk of the Whyte & Mackay business with the exception of two malt distilleries, to address our concerns."
Vijay Mallya's United Spirits bought Whyte & Mackay in a £595m deal from Vivian Immerman in 2007.
Mr Gray said it was difficult to say how much the company was worth now, as it depended on its inventory levels. He said some observers felt United had paid too much at the time. Diageo shares closed up 24p at 2000p.
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