Comment - Remy Cointreau ditches the fizz

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Remy Cointreau's Champagne business has been marginalised by the global recession and the group would rather be pouring Cognac for China.

Remy Cointreau embodies two key drinks trends that have emerged alongside the global economic downturn. The first is that Champagne has taken a battering; the retreating economic tide exposing the cracks in the least profitable of the sector's businesses.

The second trend, inextricably linked with China's resilience, is the explosion in growth for high-end Cognac in Asia. Both of these factors have combined to persuade Remy Cointreau that its Piper-Heidsieck and Charles Heidsieck Champagne brands and assets are not worth holding on to.

Champagne made losses of EUR4m (US$5.4m) in Remy's last fiscal year, to the end of March, and only accounted for around 12% of group net sales. Although sales rebounded by 16% in the first half of Remy's new year, this was not enough to claw back a drop of 42% in the same period of 2009.

By contrast, Cognac sales rose by 20% in the six months to the end of September. Last year, Cognac accounted for 50% of the group's sales as China's thirst for premium Remy Martin made the country Remy Cointreau's premier sales market for the first time. The Cognac division's operating profits rose by 38% for the year, to EUR106m.

It's not only Cognac that is outperforming Champagne at Remy Cointreau. The firm said that Cointreau, Passoa and Mount Gay Rum all increased sales in the last fiscal year. Even though profits from the spirits and liqueurs business slipped by 7%, earnings came in at EUR51.6m, still a significant contribution versus Champagne.
No surprise, then, that Remy told just-drinks today that it wants to use proceeds from the Champagne sale to bolster Cognac in Asia and increase investment behind its spirits and liqueurs business. Champagne, it said, "is not profitable enough".

One analyst said earlier this year that Remy's Champagne arm "lacks brand equity". It would certainly not be a giant leap for anyone interested in acquiring the division. Analysts think the business could fetch around EUR200m.
As for who might be interested, Evolution Securities analyst Simon Hales told just-drinks today that he "would not rule anyone out". He said that most big players, as well as private equity, would likely run the numbers over Piper-Heidsieck and Charles Heidsieck as a potential "bolt-on" acquisition.

Diageo has made no secret of its desire to expand in Champagne, beyond its 34% stake in Moet Hennessy. It is thought that the group could obtain an exemption from Moet's owner, LVMH, to move for Remy's Champagne business. However, just-drinks understands that Diageo is not seriously considering a bid.

With Diageo out, the spotlight may fall on Pernod Ricard and Bacardi. Pernod Ricard is focused on deleveraging, but it would not be a huge stretch for a group of its size. Bacardi is believed to have the funds, but does not have a lot of history with sparkling wine brands. Private equity groups could emerge as frontrunners, with a view to selling the Champagne assets on in a few years' time.  

A deal will also depend on Remy's valuation and determination to sell. Remy is attempting to push up the potential price-tag by commissioning the Credit Agricole bank to organise a bidding process. In 2004, the group is thought to have called off the sale of its Champagne business due to below-par offers.

This time around, the group looks to have a more compelling reason to sell. How quickly, at what price and who to remain uncertain.


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