After weeks of discussion on the prospects of a deal between Brown-Forman and Pernod Ricard, a surprise announcement landed on Tuesday (28 April) evening BST, with the two spirits majors confirming they had ended their talks after failing to reach an agreement.
Last month, both businesses confirmed they were in negotiations on a potential deal to create a “partnership akin to a merger of equals”.
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Since then, there has been plenty of debate among industry watchers on the potential benefits of the transaction.
Earlier this month, anonymous tip-offs to The Wall Street Journal and Reuters also suggested Sazerac had approached Brown-Forman.
Some analysts have viewed the combination with Pernod Ricard as having “a stronger strategic rationale” that one with Sazerac. A report by Reuters last week also indicated the Jack Daniel’s whiskey maker was leaning towards a deal with Pernod, though Brown-Forman declined to comment at the time.
Though it might have appeared that a transaction between the spirits giant was getting closer, we now know it wasn’t meant to be. Not much detail was given on why the two parties walked away from the table. Pernod said the two companies had been unable to “reach mutually acceptable terms”, while Brown-Forman made a similar statement.
“It’s a pity, from Pernod Ricard’s perspective, that the deal didn’t go ahead,” Richard Withagen, an equity analyst covering Pernod Ricard at Kepler Cheuvreux, tells Just Drinks. “I think they would have been able to capture cost synergies, revenue synergies.”
A deal between the distillers would have been one of the largest seen within the spirits industry since Suntory’s purchase of Beam in 2014. For Pernod, it would have been its first major deal since it was involved in the 2005 Allied Domecq or 2000 Seagram transactions.
Industry watchers had highlighted that reaching an agreement on such a deal would have been no easy feat.
After Brown-Forman’s share price had gone up 20 or 30% it was very hard for Pernod Ricard to offer something that was attractive to the Brown side of the deal without incurring the wrath of its own shareholders
Trevor Stirling, senior analyst at Bernstein
As Bernstein analyst Trevor Stirling, who covers Pernod Ricard, said in a note yesterday “based on the pre-leak share prices, a deal looked feasible under certain conditions and if the stars aligned”.
Agreeing on financial terms were likely made harder after media reports emerged around the initial talks and Sazerac’s subsequent reported bid. “The two companies were stuck between Scylla and Charybdis,” Stirling added.
Speaking to Just Drinks, Stirling further emphasises this point. “After Brown-Forman’s share price had gone up 20 or 30% it was very hard for Pernod Ricard to offer something that was attractive to the Brown side of the deal without incurring the wrath of its own shareholders. So, unless the share prices realign, the deal’s off.”
Withagen doesn’t expect the two companies to come back to the table, or, at least, not for a while. “It’s certainly not going to happen anytime soon… I think as long as [Pernod CEO] Alexandre Ricard will be there, you know, it’s probably unlikely.”
Without being in the room where it happened, it’s hard to know the key reasons behind why the talks ended. But, instead of speculating about why the discussions didn’t lead to a deal, it might be more fruitful to think about what could happen next for Pernod and Brown-Forman.
For both companies, “it’s back to business as usual”, according to Stirling, but more so for Pernod. He says the company’s shareholders will be concerned about the problems facing the business, such as the tough spirits market in the US, its prospects in China and its debt levels.
The Absolut vodka maker has seen its sales come under pressure in the US and China in recent quarters, due to inventory adjustments and macroeconomic challenges.
In its third-quarter accounts released earlier this month, the group reported a 12% drop in organic net sales in the US and a 7% decline in China.
The group is also facing the challenge of the ongoing conflict in the Middle East, which prompted the company, in its most recent results, to amend its organic net sales outlook to a forecast of a 3-4% decline in organic sales.
Withagen shares a similar view to Stirling about the concerns of Pernod’s shareholders. He adds investors will also want to know if the company’s financial pressures may improve in its 2027 financial year, “and is there any reason to expect some better underlying demand”.
Some see a slightly different scenario for Brown-Forman now the talks with Pernod have ended.
“In the case of Brown-Forman, it’s a little more complicated, depending on how secure this purported Sazerac bid is,” says Stirling. He notes if the group’s share prices reverts back near the same level it was before news of its talks with Pernod first emerged, they’ll be facing questions from shareholders.
Shares in the Herradura Tequila maker were down nearly 10% at 15:11 BST yesterday and had dropped just over 10% by market close.
“It really depends on the Sazerac bid. How serious was that? Is it fully funded? Was it more a speculative throw something in to see what happens?” Stirling says.
“Both companies have to explain what was it that attracted them in the first place and why did they start to pursue the potential combination at all? But I think for Brown-Forman, there’s potentially… more of an obligation to explain why they turned on the Sazerac bid.”
With Brown-Forman and Pernod having failed to come to an agreement, might the Kentucky-headquartered distiller still consider Sazerac’s reported bid? It’s not likely, according to some analysts.
While the combination of Brown-Forman and Sazerac would be a big deal, it would be more of a US-focused transaction, says Stirling. “It doesn’t give Brown-Forman and the platform and emerging markets that Pernod Ricard would have. And, you have complications around share of US whiskey, which might be achievable or not”, he explains.
In a client note yesterday, Barclays analyst Lauren Lieberman also said she and her colleagues, who cover both Brown-Forman and Pernod, view the US distiller’s statement as an indication that it would not be moving further with Sazerac’s purported proposal.
“It’s not immediately clear what has proved to be the sticking point(s) in negotiations but the statement from Brown-Forman suggests to us that it may be a return to business as usual ahead for the company,” she noted, adding the Woodford Reserve maker’s statement “seems to us to point towards a focus on normal course operations versus suggesting an appetite to engage in talks with Sazerac”.
TD Cowen analyst Robert Moskow said in a note to clients that he and his colleagues, who cover Brown-Forman, “do not expect a renewed M&A path via Sazerac given balance-sheet constraints”. For Brown-Forman, a deal with Sazerac is “less strategic from a geographic and portfolio overlap standpoint”, Moskow said.
In another note earlier this month, Moskow had said there may be other suitors interested in a deal with Brown-Forman. Those possible bidders he said then could “theoretically” be Bacardi and Campari, “based on the synergies that they could derive from the merger”. He also mentioned Diageo as a potential suitor but caveated “they are highly leveraged.”
Might there be opportunities for Brown-Forman for transactions with other companies? While Moskow may have pointed to potential bidders several weeks ago, in a note today (30 April), he said: “Recent developments also reinforce our view that Brown family governance reduces near-term takeout probability.”
While the prospect of a combination of Brown-Forman and Pernod has been quashed for now, some believe this won’t be the last attempt we see from spirits players to find new ways to win in a challenging market.
As Withagen says: “The merger talks between Pernod Ricard and Brown-Forman probably signal an intention or willingness of the companies in the space to become more efficient.
“One of the reasons has been that the spirits market has been really tough in the last three years, so I think that made a possible deal between Pernod and Brown-Forman more obvious than, say, a couple of years ago.
“But, you know, many spirits companies are in the same boat, right? I mean, they also face pressure on top line, pressure on profitability, so if there is an opportunity to combine two businesses, extract cost synergies or revenue synergies, I think companies will look at that. This could be sort of a catalyst or a trigger for other companies to think about potential deals.”
