A COCKTAIL of Beefeater Gin and Kahlua liqueur with Jack Daniel’s would be a potent combination indeed, so it was little wonder that it went straight to investors’ heads.

There have been reports for weeks that Allied Domecq, the UK spirits group which boasts Beefeater and Courvoisier in its well- stocked drinks cabinet, could be a bid target. The stories seemed to harden yesterday with one report that Brown- Forman, the US owner of JD’s and Southern Comfort, is already preparing a bid in concert with family-owned Bacardi and the US venture capital group Texas Pacific.

Well, maybe. It is certainly true that everyone in the drinks industry is looking at potential ways to consolidate (perhaps with the exception of Diageo, which is by far the biggest outfit and would come up against serious regulatory problems if it attempted to buy more). Changes at Bacardi suggest that it is edging towards a stock market flotation. And the higher rating ascribed to Diageo shares, mainly attributed to the supposed benefits of scale, is also encouraging its second-tier rivals to think about bulking up. On the other hand, a lot of the noise in recent weeks has been inspired by hedge funds and speculative investors with a story to punt and a turn to make, by hook or by crook.

Also, Allied Domecq shares did look a little on the cheap side at their nadir of 261p in March, particularly with the prospect of improved news from the company later this year and a change in sentiment towards Allied’s wine business, which appears to be coming good. (It couldn’t really get any worse, after a February profit warning blamed on a pension funding crisis and a downturn in Spain.)

Allied is a strong generator of cash but that may not be enough to tempt a venture capitalist. The fortunes of some of its brands could dive quite dramatically if cash is diverted away from marketing to pay off venture capitalists’ debt, and the current valuation of the company, 10 times earnings before interest, tax, depreciation and amortisation, might make it tough to get a bid to stack up. The cash does provide a good underpinning for the Allied dividend, though, which gives the stock a yield of 3.5 per cent, making it worth holding, even if the valuation now looks full.