Pernod Ricard in a fine mess

France | After Elliott Management announced it had spent about USD 1 billion to build a stake of more than 2.5 percent in drinks company Pernod Ricard at the end of 2018, the New York-based hedge fund called for improvements to Pernod Ricard’s margins and governance, which it claimed needed more outside influence.

The founding family of Pernod Ricard remains its largest shareholder with a 14.2 percent stake and the biggest board room presence. Pernod Ricard has since reshuffled its board. The long-time insider Pierre Pringuet has given up his vice-chairmanship, while the well-connected businesswoman Patricia Barbizet, the former CEO of the auction house Christie’s, was named to the newly-created role of “lead independent director”.

That was an easy job. Even catching up to Diageo, the world’s number one drinks company, by narrowing a 5 percentage point gap in operating margins versus Diageo, seems feasible.

So why is Pernod Ricard in a fine mess? Elliott also recommended that Pernod Ricard should explore the option of a merger, a polite way of saying that it should be sold.

This did not go down well with Pernod Ricard’s CEO Alexandre Ricard. At a media briefing on 12 February 2019, he reaffirmed Pernod Ricard’s position as an industry “consolidator”.

He said: “[We] have been a consolidator in the industry and I hope that it will be no surprise as I reiterate very clearly and specifically: Pernod Ricard is here, Pernod Ricard is here to stay, and Pernod Ricard is and will remain a consolidator.”

Pernod Ricard was formed in 1975 by the merger of pastis makers Pernod and Ricard. Since then the business has grown to become the world’s second largest spirits firm with a market capitalisation of EUR 40 billion (USD 45 billion).

If Pernod-Ricard were to be sold, who could buy it? Many think that Diageo or LVMH would face insurmountable antitrust obstacles if they attempt to take over Pernod Ricard solo.

However, analysts at Berenberg have already worked out a plan, which could see Diageo and LVMH team up for a joint acquisition - much like brewers Heineken and Carlsberg did when they took over and split up their rival Scottish & Newcastle in 2008.

Berenberg said that “an efficient split of brands between LVMH and Diageo should overcome any regulatory hurdles that such a deal would face.”

The trouble with these deal scenarios is that speculation can become fact if analysts only push hard enough for them. Watch this space.

 alc