Activist Fund Elliott Set To Shake Up Drinks Giant Pernod Ricard
Elliott Management has built up a stake in Pernod Ricard and called on the family-backed French drinks company to boost profit margins and improve returns for investors.
Elliott said on Wednesday December 12 that its stake in Pernod Ricard was just over 2.5%, its first holding in a French blue-chip, worth around €930 million.
The fund also said it had met Pernod chairman and CEO Alexandre Ricard to discuss the way ahead.
A source close to the matter told Reuters Elliott had sent a letter to the Pernod Ricard board asking for €500 million in cost cuts and suggested options such as merging with another spirits company.
An "Outstanding" Portfolio
New York-based Elliott, which has $35 billion under management and a track record of pushing hard for change in companies, said Pernod had an "outstanding" portfolio of brands and was one of the most attractive investment opportunities in the industry.
But Elliott said Pernod, the world's second largest drinks maker after Britain's Diageo, had lost market share across key areas and had underperformed rivals on operating margins and total shareholder return.
A Disappointing Track Record
It also said Pernod's M&A track record was disappointing, particularly its 2008 purchase of Absolut vodka.
"An environment of inadequate corporate governance and a lack of outside perspectives have contributed to this underperformance," Elliott said, suggesting that "operational and governance improvements would allow Pernod to unlock much of the value that the company is capable of delivering".
Pernod's biggest market by sales is the United States, the world's most profitable spirits market.
But analysts have long said the company's is underweight in the United States, which has prompted speculation about a tie-up with rivals such as Brown-Forman, which makes Jack Daniel's, or Jim Beam maker Beam-Suntory. But mega deals in global spirits are rare because many companies are family controlled.
Pernod Defends Strategy
Pernod Ricard said in response that while it valued constructive input from its shareholders, its strategy of long-term value creation was "the right one".
It said it had created €11 billion of value and increased its share price by 37.7% in the last three years.
Pernod Ricard was created via the 1975 merger of two French anise-based spirits makers - Pernod, founded in 1805 and Ricard, founded in 1932. It is now a global company with annual sales of €9 billion after a string of acquisitions.
Another source familiar with the matter said Elliott, which had been looking at Pernod for over a year, also believed that its 14-member board needed more independence and diversity as many directors were linked to the Ricard family. The board comprises seven independent members.
Elliott's move comes as CEO Ricard, who has made sales growth his top priority since he took over in 2015, is preparing a new three-year strategy plan, which he could reveal on February 7.
Some analysts have expressed disappointment that Pernod's stronger than expected sales growth has not translated into a stronger operating margin, which was 26.23% in fiscal year 2017/18 against Diageo's 31.4%.
Potential For Greater Efficiency
"There is potential for Pernod Ricard to be more efficient. However current management have been squeezing the cost base for several years and in our view need no encouragement to continue," Bernstein analyst Trevor Stirling said.
"The board of directors could benefit from some more external heavy hitters. However we think unlikely that Eliott's 2.5% stake will carry much weight when the Ricard family controls 15% of the shares and 21% of the vote," he added
Pernod shares have risen by roughly 7% so far in 2018, beating a 5% drop in the broader Stoxx Europe 600 Food & Beverages Index and a 4% rise in Diageo.