In the Spotlight - Pernod Ricard, Vin & Sprit - questions, questions
Pernod Ricard's victory in the race to buy Vin & Sprit has sent shockwaves across the global spirits industry, whilst also throwing up a vast array of questions. In a spotlight special, Jessica Harvey picks through the finer details of the deal to find answers to those questions. Elsewhere on the just-drinks site, Olly Wehring talks to Tom Flocco, president and CEO of Beam Global Spirits & Wine, who had been everyone's hot favourite to win V&S's hand.
Pernod Ricard has beaten rivals in the final auction for the acquisition of the Swedish state-owned Vin & Sprit. The French company trumped Fortune Brands, Bacardi, and Investor AB together with private equity firm EQT, in securing ownership of the Absolut vodka trademark and EUR346m of debt, in what turned out to be a EUR5.63bn (US$8.88bn) deal.
The surprise factor is double-pronged. V&S had been thought to be worth in the region of $6-7bn, while US-based Fortune Brands was also widely-tipped as the front-runner, due to its Future Brands distribution joint-venture with V&S in the US. The two also make up two-quarters of the global marketing and distribution company, Maxxium.
The purchase, which will not include V&S' 10% interest in Beam Global Spirits & Wine, also marks the end of Pernod's quest to buy Stolichnaya from SPI, with the French company set to end its distribution deal for the vodka brand shortly, while also looking to extract V&S from the Maxxium distribution joint venture within the next two years.
The integration of the Absolut brand into Pernod's brand portfolio and distribution network has been described by the company as a move that has "outstanding growth prospects". An analyst at Sanford Bernstein described the deal as one that "will prove to be moderately value-enhancing", while other analysts at Global Equities and HSBC have chimed in to agree that the Absolut acquisition is "good news" for shareholders and a "master stroke" by Pernod.
Much as the weighty price tag signifies an adequate amount of financial risk, most seem to view Pernod's movement as bold, but ultimately positive. Merrill Lynch has reflected this, noting the benefits, but also airing caution about the operational risks ahead. If Pernod aims to make a swift exit from its US distribution contract with Fortune as well as Maxxium's global one, it will not only take time to untangle the red tape, but could also cost the company a hefty sum. Early freedom is unlikely to come without a significant cost, it seems.
With the mercurial nature of the current economic climate, investors are naturally unsettled and dubious of what such a purchase on Pernod's part could represent for them. Not forgetting that the company will embrace EUR346m worth of debt as well, one analyst at Oddo Securities has predicted that this will affect Pernod's credit rating negatively, while warning that the rating could only get worse. Similarly, another analyst at Cantor Fitzgerald has speculated that the combination of full price and debt will unnerve certain investors, while warning that Pernod needs to tread carefully now.
Notably, there are a number of hurdles for Pernod to clear before it can settle into pushing the Absolut brand to its full potential alongside its premium portfolio.
For instance, Remy Cointreau is set to pay $240m to exit Maxxium in March next year. To do the same, Pernod needs to face the prospect of paying more than what it reported to be a "low contractual cost" for the pleasure of making that journey.
Last September, Swedish reporters speculated over what V&S would have to pay to remove itself from distribution deals with both Maxxium and Future. The total sum would reportedly cost up to an estimated $893m, meaning Pernod would have to approach the parties not only with several sacks of cash, but also a smooth-running plan which would benefit to both companies if it hopes to action the proposed changes.
The company has suggested, however, that it is prepared to see out both the Maxxium and the Future Brands set-ups. "Where there is a contract, you have to abide by it," said Pernod's managing director, Pierre Pringuet, yesterday (31 March). "The cost (to exit Maxxium) is not very high - a small number of tens of millions. It's a marginal cost, it's not the same size as Remy's exit costs."
Pernod's chairman and CEO, Patrick Ricard, has crowed that buying V&S elevates the company to the position of "co-leader of the global wine and spirits industry", sharing the top-spot with Diageo. Pernod is now only 2m nine-litre cases behind Diageo in terms of global sales volume compared to 18m previously, narrowing the gap between the two players in terms of scale. An analyst at Shore Capital highlighted that the purchase could also be bad news for Diageo from a brands perspective, as Absolut will likely compete more aggressively with Diageo's Smirnoff vodka brand.
The company has claimed that it will now hold the lofty number one position in premium spirits with a 27% market share - although, without an industry-recognised definition for "premium spirits", this matter is open to debate. Even so, with this new status, it will be interesting to see how Pernod's rivals compete following its exhaustive climb up the ranks.
Another question the acquisition now poses, in light of the inflated purchase price for V&S, is whether this now marks the end for small, domestic and straightforward deals within the world's beverage industry. HSBC analysts noted that, despite this being a pivotal buy, the high cost of the deal surely proved that there were no cheap opportunities left in this business, leaving big-money debt-financed acquisitions as the only way forwards for the future in what has become an expensive and consolidating global drinks battlefield.
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Pernod Ricard's victory in the race to buy Vin & Sprit has sent shockwaves across the global spirits industry, whilst also throwing up a vast array of questions. In a spotlight special, Jessica Harvey...
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