Analysis - Potential bidders weigh up benefits of V&S move
The Swedish spirits producer V&S Group is up for sale and, with the global premium vodka brand Absolut as its prime asset, has attracted much attention from major international players. Jeremy Cunnington of Euromonitor International weighs up the pros and cons of a move for V&S facing the likely bidders.
Even with a valuation of EUR4.3bn (US$5.7bn) the sell-off of Swedish spirits producer V&S Group has led to a flurry of interest from the usual suspects, including Diageo, Pernod Ricard, Bacardi and Beam Global.
The strength of V&S is vodka - it is the second biggest vodka producer in the world - and the jewel in the crown is its global brand Absolut. Vodka represented more than 70% of the 16m cases of branded wine and spirits sold by V&S in 2005, while the Absolut brand accounts for around 50% of the company's total sales. Absolut is the largest vodka brand worldwide, and is in the top three in all regions except Eastern Europe and Asia Pacific.
V&S has a number of small vodka brands such as Luksusowa in Poland, and the super-premium brand Level, as well as other spirits brands, including Plymouth Gin, Cruzan Rum and Aalborg. It also has a range of wine brands and distributes brands from a number of leading wine companies such as Gallo.
V&S is the leading spirits company in Sweden, the second largest in Finland and the third biggest player, albeit some distance behind the leading two companies, in Norway. It is also the dominant company in Denmark, with nearly half of the 1.7m-case market. Part of the Maxxium distribution alliance, V&S also has its own strong distribution in the Baltic region and offers a major presence in the 29m-case Polish spirits market.
While a purchaser would gain access to the Maxxium partnership and the Future Brands distribution joint venture with Beam Global in the US, this may not be seen as an advantage to a company with its own global network as it would face the additional cost of extricating V&S from these arrangements.
A Maxxium withdrawal is likely to cost more than the EUR240m that Rémy Cointreau had to pay to leave, as V&S' brands account for a bigger share of Maxxium's sales. The cost of withdrawing from Future Brands would be mitigated by the sale of the 10% stake V&S owns in Beam Global, which it bought for $153m in 2006, as part of the original deal.
The Swedish government could also place costly conditions on any sell-off to prevent domestic political fallout, such as insisting that there be no compulsory redundancies in Sweden, and production and the sourcing of raw materials remain in Sweden. With Sweden's high labour costs, this would restrict the potential for cost savings.
As Absolut will be the prize, a purchaser could offset some of the costs by selling off other brands like Plymouth Gin, Cruzan Rum, local wine and spirits brands, and any unwanted distribution operations.
The three leading global spirits companies, Diageo, Pernod Ricard and Bacardi, have all expressed an interest in V&S, but all have strong US and global distribution networks, so would face costs in dismantling V&S's network. All could afford to buy the company, but there are potential problems with implementation.
Diageo would have the greatest difficulty in acquiring V&S, because of its own strong presence in vodka. While Absolut's premium positioning would complement Smirnoff, Diageo would nevertheless face huge competition issues. The combined Diageo and V&S vodka market share in many EU countries and North America would exceed 40%, enough to trigger competition authority investigations.
Selling off the Popov brand could solve the North American dilemma, but further problems would arise in Australasia as well as many dynamic Latin American and Asia Pacific countries.
Absolut's international spread is its main appeal to both Pernod Ricard and Bacardi even though both already have a number of vodka brands.
Bacardi's Grey Goose premium brand has global volume sales of less than a third of Absolut's. More importantly, despite Bacardi launching Grey Goose internationally, the US still accounted for over 90% of its 2.3m-case volume in 2005.
Pernod Ricard, meanwhile, owns the Wyborowa brand and has a long-term distribution agreement for Stolichnaya outside Russia. Stolichnaya, the larger of the two, has a similar proportion of sales in the US to Grey Goose.
Absolut's global strength would mean that both Pernod and Bacardi would no longer have to spend large amounts on building their existing brands internationally, but focus on building Stolichnaya or Grey Goose in selected markets.
Pernod may also see acquiring Absolut as a way of obtaining a better deal from SPI, Stolichnaya owners, in its current negotiations over the rights to the brand, though the Swedish brand would undoubtedly enhance its global profile.
It would also enhance Bacardi's range, though Euromonitor suggests the company may do better to invest in expanding its presence in brown spirits categories such as Cognac and Scotch whisky, to capitalise on booming sales in dynamic emerging markets. Bacardi may deem a future bid for Rémy Cointreau to be a better use of its acquisition funds.
That leaves Beam Global as a more likely candidate, although it has so far been reticent in expressing an interest. The US company lacks a major vodka brand and already has close links with V&S through the Future Brands and Maxxium distribution arrangements. The fact that it would not have to pay any fees to remove itself from these alliances could potentially allow it to bid more for V&S than its rivals.
Following Constellation Brands' declaration that it was not interested in V&S, no other spirits company has the financial muscle to buy the company except perhaps Brown-Forman. But a move by B-F is very unlikely, as its strategy seems more focused on buying and developing smaller brands.
Given current trends in the mergers and acquisitions arena, another source of potential bids could be the private equity sector. A private equity group would have no problems in raising the money to bid for V&S, and would not need to extricate V&S from existing distribution agreements or have any competition issues. Yet private equity groups could be put off by conditions the Swedish Government may put on the sale.
On balance, therefore, it seems that Beam Global and Pernod would have most to gain from the acquisition. With a number of interested parties - possibly including private equity groups - this could lead to a bidding war which may result in the winner overpaying. That would mean the acquirer would have to grow the Absolut brand significantly, while retaining the brand's margins, which may be difficult. Despite the rapid growth of vodka in many regions, competition is becoming increasingly intense, not only from established local and international brands but also from Eastern European producers, such as Soyuz-Victan, which are looking to counter declining domestic markets by expanding abroad.
Companies: Absolut, Bacardi Ltd, Maxxium, Pernod Ricard, Diageo, Beam Global Spirits & Wine, Ricard, Fortune Brands, Stolichnaya, Cointreau, E&J Gallo, Smirnoff, Wyborowa, Constellation Brands, Brown-Forman
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