France: Will Diageo and LVMH split up Pernod-Ricard?

French liquor-maker Pernod Ricard might be target of a take-over bid by a consortium of luxury group LVMH Moet Hennessy Louis Vuitton and Guinness-owner Diageo, according to a new report by Berenberg analysts. Paris-based LVMH which has close to US$40bn in resources for takeovers "could take the lead in a potential bid," says Zuzanna Pusz, luxury-sector analysts at Berenberg."An efficient split of brands between LVMH and Diageo should overcome any regulatory hurdles that such a deal would face."

Pernod Ricard, which was created in 1975 by joining the two rivaling pastis companies Pernod (founded in 1805 in Pontarlier, Eastern France at the border to Switzerland) and Ricard (founded in 1932 in Marseille, Southern France) went into the focus of attention of investors in December last year, when activist investor and billionaire Paul Singer and his hedge fund Elliott Management Corp. disclosed a stake in the world’s second largest spirits company. Singer is known for aggressive activist campaigns that put boardrooms under pressure to make radical changes. With regards to Pernod Ricard, Singer is pressing the management to slash costs and overhaul corporate governance.

In an interview with BloombergAlexandre Ricard, Chairman and Chief Executive Officer of Pernod Ricard and third family member to run the business, said last week, “I am very open for a dialogue with our investors including Elliot and we have had an open dialogue over the last couple of months. But, to be fair, governance is something that has been improving over the years ever since I have taken over chairmanship of Pernod Ricard and which will keep on improving. Governance improvement is actually an endless process.”

“And as for margin improvement it’s fair to say that the last three years Pernod Ricard’s equity story was driven by investments to generate top-line growth which is now at the top end of industry growth. And the next three years will be all about profitable growth, good top-line momentum, while at the same time driving operating margins, and we mentioned 50 to 60 basis points of operating margin per annum,” Alexandre Ricard went on saying.

Indeed, Singer’s investment in the maker of iconic brands like the eponymous pastis brands Pernod and Ricard, as well as Scotch whiskeys Chivas Regal, The Glenlivet and Ballantine’s, Absolut vodka, Beefeater gin, Mumm champagne and Havana Club rum, runs so far much smoother than most of his other investments. As a consequence, “the fund could very well sell its stake tomorrow and declare a win for its clients,” stated Bloomberg columnist Lionel Laurent last week.

Pernod Ricard’s stock has done quite well over the last five years with an annual gain with reinvested dividends of 14.5 percent and beating out other competitors like Diageo.

“What our shareholders really like about Pernod Ricard is the consistency in our strategy and more specifically our unique dual-leadership exposure to both China and India. In both markets we have a leadership position, a very strong one, with 45 percent market share in both of these markets,” concludes Alexandre Ricard.

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