Pernod Ricard takes on Absolut
Although not many had seen it as a certainty, the recent acquisition of Absolut by French drinks group Pernod Ricard is no big surprise. The company had made no secret of its desire to add a vodka to its portfolio of premium brands and it had even stated that it would be either Stolichnaya – for which they already owned the distribution rights – or Absolut, which was touted then as soon to be put up for sale by the Swedish government.
If surprise there was, it concerned the speed at which the decision was reached by the said Swedish government in assigning the sale to Pernod Ricard, which happened a mere week after the offer was put in. It has to be said that with the backing of six of the largest European banks who provided Pernod Ricard not with the traditional commitment letter, but with a fully signed credit contract, the drinks giant’s position certainly was very strong.
The deal, according to Pierre Pringuet (pictured left), managing director of Pernod Ricard, makes sense from a strategic point of view, but also from a financial perspective. The sale, which was a mix of US dollars and euros due to the impossibility of performing the transaction in Swedish kroner (this large a deal would have destabilised the currency’s market), comes in at just under €6bn and will be fully financed by debt, bringing Pernod Ricard’s total debt to about €12bn.
This is six times Pernod Ricard’s EBITDA (Earnings Before Tax, Depreciation and Administration), which is the same multiple the company had when it closed the transaction on Seagram in 2001 and again when it closed the deal on Allied Domecq in 2005. “It is very much a ratio which we have been used to, and Pernod Ricard is usually pretty quick in leveraging the balance sheet, because for instance at the end of December (2007) this number had been reduced to 3.8 times the EBITDA, only two and-a-half years after the Allied Domecq deal,” said Pierre Pringuet.
The deal should attain synergies of about €125m-€150m in the long term. However, before these synergies are attained, the distribution deals held within Future Brands in the US (in a joint venture with Beam Global Spirits) and Maxxium in the rest of the world will have to expire.
Future Brands does not have an early departure mechanism, and as such will force Pernod Ricard to wait until the joint venture comes naturally to an end in March 2012 – unless Beam decides to end the agreement beforehand – although Pringuet is not worried about this state of affairs seeing as both brand owners (Beam and Vin & Sprit) were responsible for their own brands. “the way it’s built is that the two partners spread the costs of the sales force. Each partner invoices the customer directly. And all the marketing (strategic and promotional) is driven by each brand owner,” he said.
Maxxium, on the other hand, does have a mechanism in place to allow its members to leave the agreement early – at a cost – which has already been exercised by Rémy Cointreau (which will leave Maxxium in 2009). Once the acquisition is finalised, Pernod Ricard will trigger this mechanism, which means that the agreement will be terminated after the two years’ notice period.
From a strategic perspective, the deal made a lot of sense for Pernod Ricard. As mentioned above, the company’s premium portfolio was lacking a vodka, and discussions to purchase Stolichnaya had not really gone anywhere. So when the opportunity of buying Absolut came up, it could not be resisted, for more reasons than one: it plugged the vodka gap and it strengthened Pernod Ricard’s position in the all-important US market. “We had a market share of the international western-style spirits around 15% and only about 8.6% in the US,” Pringuet explained. “With the addition of V&S, our market share in the US jumps to 14% with a worldwide market share of about 18-19%. We are really normalising our position in the US and becoming the clear number two. This means that our position in the industry and particularly vis-à-vis the US wholesaler will be strengthened quite dramatically.”
Provided the competition authorities give the go-ahead, Pernod Ricard will find itself the proud owner of a massive international vodka brand – 11m cases worldwide (5m in the US) and 40% share of the global vodka market – that still holds enormous potential for further growth (for instance only 40,000 cases are sold in China). Added to this will be the addition of Cruzan Rum, which unlike Havana Club can be sold in the US, and Level, a super-premium vodka with only 150,000 cases but a lot of potential for further growth.
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