Remy Cointreau has one trick, but its working like a dream

Remy Cointreau has one trick, but it's working like a dream

With China continuing to guzzle premium Cognac and debt levels enviably low, Remy Cointreau's main dilemma looks to be whether to acquire something or deliver value to shareholders by buying back shares.

Apparently, Europe is heading for a double-dip recession. China's economy, meanwhile, is looking a little more sluggish than usual. At Remy Cointreau, however, the sun is beaming.

Net profits for the six months of the French firm's fiscal year rebounded strongly after the Metaxa brand in Greece sent earnings to a near-collapse in the same period of last year. High-end Cognac sales in China, where Remy now controls its own distribution, was the key driver. As for the Champagne business - remember that? - today's results only serve to show how insignificant Piper-Heidsieck had been for Remy Cointreau's overall performance.

During the six-month period, Remy managed to halve its net debt to EBITDA ratio, which fell to around one at the end of the half-year. Low debt and high profits got tongues wagging today (29 November), including that of company CEO Jean-Marie Laborde, who was quoted in Reuters as saying that the firm has a takeover warchest of between EUR500m and EUR800m. Some analysts have long forecast a Remy raid at the M&A dinner table.

The group might, however, decide to focus on share buybacks. According to French press reports today, it already has shareholder blessing to buy back up to 10% of its issued share capital. On the other hand, it could combine the two options and spring an acquisition via some kind of equity swap, according to investir.fr.

The bottom line is that, like the FC Barcelona's Pep Guardiola, Remy Cointreau's dilemmas look enviable to most. And yet, without wishing to pinpoint the one puff of cloud in an otherwise clear sky, the group is heavily reliant on one category of spirits. For that matter, it is also increasingly reliant on one country: China.

Analyst group Sanford Bernstein forecast last week that Cognac has the legs for long-term value growth of 10% per year on average, with long-term volume growth pegged at half of this rate. Much of this value growth is due to China.    

In 2010, Greater China represented 18% of global Cognac volumes but 34% of global Cognac sales by value, according to Bernstein, which released a detailed note on the Cognac sector

While Pernod Ricard's Martell brand has been the biggest beneficiary of China's thirst for the spirit, Remy has gained value share in the market thanks to its Louis XIII expression. "Rémy has a fantastic franchise in ultra-premium Cognac with Louis XIII and is likely to continue to gain value share," said Bernstein. 

It looks good, of course. That said, if I was at Remy, I would still feel a little anxious at being so heavily reliant on just one brand. Remy Martin accounts for around 84% of the company's annual earnings before interest and tax.

It's a simple point but, for me, there lies the weakness in Remy Cointreau's glossy armour. Whether it's countries or businesses, overeliance on one product, market or service has so often proved a problem. The group must hope that unforseen events do not knock it from its perch.