about buying the spirit section of rival Seagrams, according to a Reuters report from London.

The agency said that Bacardi was in talks with the British company Diageo Plc over a joint bid for Seagram's spirits business.

It is believed the companies have joined forces to thwart a bid from rival Allied Domecq Plc as well as improving long-term growth prospects.

The report said 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.

Bacardi in talks with British company The British group fits well 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,'' Reuters quoted from an industry source.

It said that 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 Bacardi group before, selling Bacardi its Dewar's scotch and Bombay gin.

The report adds that 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.

World number four, the privately-owned Bacardi does not have the firepower to bid alone, while number five France's Pernod-Ricard is also seen as too small, analysts said.

Diageo is looking to pick up Seagram's Captain Morgan and Crown Royal, while leaving Bacardi brands it cannot touch due to competition concerns, Chivas Regal and Martell.

Seagram has the distribution rights for premium vodka Absolut, but this may revert to owner Swedish state-controlled owner Vin & Sprit.

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

The article said that although Allied's Chief Executive, Philip Bowman, would love a deal to transform his group, it would probably need a rights issue and a $7 billion-plus bid could overstretch a group with a market capitalisation of $5.27 billion.

Reuters said Diageo, advised by UBS Warburg, is edging into favourite spot, adding both Diageo Bacardi have extensive distribution in the key U.S. market, which could mean them winning bigger cost savings than Allied, seen as high as 200 million pounds a year.

Diageo now has the cash to invest in drinks as it has announced a Burger King float and a planned sell-off of Pillsbury.

Reuters said after merging its two remaining divisions, wines and spirits unit UDV and Guinness beer, Chief Executive designate Paul Walsh needs to convince investors of its long-term growth prospects. Diageo was formed in the December 1997 by the merger of Guinness and Grandmet.