Pernod Ricard under attack

France | The world’s number two drinks group, Pernod Ricard, is preparing for battle against the US investment fund, Elliott Management Corporation. Having gradually built up a stake of 2.5 percent – that’s a ticket of USD 1 billion – in Pernod Ricard, the activist investor launched its attack on 12 December 2018, calling Pernod Ricard’s governance “inadequate” and performance “inferior” to competitors such as Diageo.

It also said Pernod’s M&A track record was disappointing, particularly its 2008 purchase of Sweden’s Absolut vodka. The hedge fund said Pernod’s EUR 6 billion (USD 6.8 billion) acquisition of Absolut in 2008 has fallen short of expectations. In the US, Absolut has struggled with fierce price competition and customer defection to Tito’s vodka and other tipples like gin. In 2015, Pernod took a big write-down on Absolut, blaming a challenging US market.

Not enough, Elliott has insisted on cost cuts of EUR 500 million (USD 568 million) per year, including redundancies and suggested, without saying it explicitly, that a split of the group’s assets would guarantee better results.

For Pernod Ricard’s current CEO, Alexandre Ricard, who is the founder’s grandson, and has been in control for three years, the accusations seem unjustified in light of the firm’s most recent figures. Organic growth was 6 percent in 2017, up from 2 percent in 2016. The stock has gained over 40 percent in value over the past three years to give the company a market capitalisation of EUR 37 billion (USD 42 billion).

The only downside: the firm’s operating margin was 26 percent in fiscal year 2017/2018 against Diageo’s 31 percent.

Pernod Ricard cannot easily fob off Elliott. The family behind it only holds about 14.2 percent (with 22 percent of voting rights), and GBL, the holding of the late Belgian billionaire Albert Frère, which has already declared solidarity with Mr Ricard, 7.49 percent. This will be insufficient to block a hostile assault, but probably sufficient to build a defence.

New York-based Elliott has USD 35 billion under management and a track record of pushing hard for change in companies. Analysts have long said Pernod Ricard is not doing as well as it could in the US, which has led to speculation about a tie-up with rivals such as Brown-Forman, which makes Jack Daniel’s, or Jim Beam’s owner Beam-Suntory.

CEO Ricard, who has made sales growth his top priority since he took over in 2015, is preparing a new three-year strategy plan, which he could reveal on 7 February 2019.