Diageo plc is in talks with Bacardi over a joint bid for Seagram's spirits business to thwart a bid from rival Allied Domecq Plc and enhance its long-term growth prospects, industry sources said yesterday.

Diageo wants to stop one of the biggest prizes in the wines and spirits world falling to its nearest rival, and ensure future growth at its core spirits and beer business as it hives off its US Pillsbury food and Burger King divisions.

Diageo has a good cultural fit with Bacardi as both focus on key big brands, have developed innovative ready-to-drink spirit mixes like Breezer and Smirnoff Ice and together could win more savings than an Allied-Seagram deal.

"Diageo knows it can work with Bacardi to split up the Seagram portfolio, and also knows a long-term relationship with Bacardi is important," said one industry source.

Talks between Diageo and Bacardi are at an early stage, but the pace is likely to pick up later this month ahead of the publication by investment bank Morgan Stanley of its book with financial facts on Seagram's drinks unit.

Diageo has chosen to link up with Bacardi as it has worked with the Bermuda group before, selling Bacardi its Dewar's scotch and Bombay gin. Also, Diageo would like to get closer to the group that owns the one brand it truly coverts - the world's top selling spirit, Bacardi white rum.

This Diageo consortium is likely to be the main competitor with Allied for the $7 billion-plus Seagram's spirits sale, put on the block after Seagram agreed a $34 billion merger with Vivendi to create new media giant Vivendi Universal.

Seagram is the world's third-largest spirits grouping, with its Chivas Regal scotch, Martell cognac, Crown Royal Canadian whisky, Captain Morgan dark rum and Absolut vodka distribution.

Allied was initially the frontrunner for Seagram and the two portfolios would make an excellent geographic and product fit, with the only competition concerns in Canadian whisky and cognac.