NEWS ANALYSIS – Absolut Uncertainty

Speculation is growing over who may buy Sweden’s lucrative vodka brand, following the election of a new centre-right prime minister, says Ben Grant

When Fredrik Reinfeldt was elected as prime minister of Sweden last September, a ripple of anticipation engulfed the world’s leading drinks companies and, once again, the lawyers and the bankers began sharpening their pencils. As the leader of a centre-right coalition government, one of the cornerstones of Reinfeldt’s electoral platform was a series of high-profile privatisations. Speculators immediately began to predict that state-run liquor producer Vin & Sprit (V&S) could be one of the first companies to be sold off, making available one of the most desirable brands on the market, Absolut.

According to Impact the Swedish giant was the third largest spirit brand by volume in 2005, while sales rose by a further 7% last year. Absolut enjoys excellent penetration in the lucrative US market, it is generating strong growth in other markets and is one of the most powerful players in travel retail. Speaking to the drinks business, V&S CEO Bengt Baron reported the brand is “gaining market share in the US and registering double-digit growth” elsewhere – in fact international growth is “out-stripping” growth in the US. It is now distributed in 126 markets, enjoys tremendous brand equity (engineered by one of the most impactful advertising campaigns on record) and last November punched through a major sales milestone, shipping more than a million nine-litre cases in a month.

The Swedish government has historically been a major stakeholder in the country’s biggest companies. But Reinfeldt has promised to roll back this tradition, declaring “the state should not own companies if the ownership does not have an obvious strategic role and if we can find an investor willing to pay the right price”. Notably he has gone on the record saying, “I’m not ruling anyone out”, opening the door to a host of international companies who would dearly love to add Absolut to their portfolios.

Speaking in December Baron shrugged off questions about a possible sale declaring: “I can’t discuss the issue of ownership, it’s up to the Swedish government. We’re just focused on continuing to grow the business.” However, in a recent interview with the Financial Times he warned the government that its ideological desire for prompt privatisation may undermine the value of the company. “I don’t believe Vin & Sprit is at its peak,” he said. The government “needs to ask what it gives up if it goes fully ideological and what it can get if it gives up ideology for long-term value gain.”

The main contenders
In spite of Baron’s appeal the government seems set on engineering a relatively prompt sale with both ING Baring’s Gerard Rijk and Dresdner Kleinwort’s Andrew Holland predicting that the deal will be done before the end of the year. In a research note to investors, JP Morgan analyst Simon Hales has valued V&S at approximately €4 billion (£2.6bn). If sold to a rival, this figure could increase to €4.6bn. But how would the V&S brands fit into the portfolios of the main contenders? And who is leading the field at this stage?

When it comes to ambitious acquisitions in the drinks industry Pernod Ricard is the name that invariably crops up first. The company has grown beyond recognition through the Seagram and Allied Domecq deals. The only areas where it is slightly lacking, however, are a relative weakness in the US and the lack of a truly global vodka brand. Resolving the Stolichnaya issue would partially address both of these issues, but securing Absolut would be an even more attractive proposition. Rijk predicts that Pernod is “most likely” to win the race, while Hales comments that the
French giant “would benefit most” from a deal.

Alongside Pernod, Fortune Brands seems the most likely contender. However for Fortune it is more a matter of necessity than desire. The company, parent of Beam Global, already distributes V&S brands in the US through Maxxium – losing this business would hit the young company hard. As a Lehmann Brothers research note points out, Fortune “has much to lose”, while Hales stresses that it “cannot afford to lose the V&S portfolio from its distribution system”. With Rémy Cointreau announcing last year that it was pulling out of Maxxium (fuelling rumour that it could be up for grabs next), the future of the distribution group looks increasingly unclear.  Like his rivals at Pernod, Beam UK MD Adrian McKeon has confirmed, “we will be looking at V&S very closely”.

According to Holland, Bacardi is well positioned to seal the deal – and having bought Grey Goose and 42 Below in recent years the company clearly has its sights set on dominating the premium vodka market. However, there is a danger of creating a rather unbalanced portfolio, and analysts have also speculated that the Swedish government could be unsettled by the fact that the company is domiciled in Bermuda.

Constellation has stated its intention to focus on developing its premium spirits business, and underlined this with last month’s acquisition of the fast-growing Svedka brand. Recent moves have made it difficult to predict the Constellation masterplan, but it seems likely that it will join the race. Diageo, meanwhile, seems unlikely to be a serious contender. Ownership of both Smirnoff and Absolut would, of course, raise competition issues (though the Lehman Brothers note pointed out that “Diageo may be able to argue that the higher price point for Absolut places it in a separate premium vodka category”). Paul Walsh’s announcement last month that the company would return £1bn to shareholders suggests that a large-scale acquisition is not currently on the cards – however, as Holland points out, Diageo may join the running if only to push up the price.

Other companies touted as possible buyers include Anheuser-Busch and Jinro of Korea. While Norwegian company Arcus seems a likely candidate to sweep up any Scandinavian interests that may not appeal to an international suitor.

INSIDERS’ OPINION

Andrew Holland, Dresdner Kleinwort
“I expect that it will be sold as a single unit. The sale process is likely to last all year. Documents will probably go out in the next few months and then companies will have time to prepare a bid. Even if it’s a very quick process it will be September at the earliest.

“The sale could be an initial public offering (IPO), this has been the case for previous privatisations in Sweden. But I think it’s likely to be a trade sale.

“There’s a long list of potential bidders. I’d say in first position is Bacardi Martini, then Fortune Brands. Fortune has the most to lose because of the US distribution. The other strong contenders are Pernod Ricard, Anheuser-Busch, Brown Forman and Constellation. I don’t think that Diageo would be allowed to buy, but there’s a chance they may bid in order to up the price.”

Gerard Rijk, ING Barings
“It’ll definitely happen, and I think the deal will go through in 2007. The most likely is probably Pernod Ricard – they want to strengthen the US position. Pernod has now digested Allied and is on the right track to make another major acquisition. I don’t think that Stolichnaya is likely to create any problem, it’s a relatively small brand so one company could easily control them both. After Pernod is probably Fortune, they need to get control in the US. I expect a large field of contenders. Constellation and Bacardi will definitely take a look, mainly out of curiosity so they can take a look at the numbers, but I don’t expect them to bid strongly.

“Maxxium is beginning to fall apart already – I think its days are numbered. Companies want to secure their future and that means developing a full portfolio of brands, not giving the profits to somebody else as part of a joint venture.” 

Simon Hales, JP Morgan
“We think Pernod Ricard would benefit most from an acquisition of V&S. The group’s portfolio lacks a premium vodka brand and Absolut’s strength in the US could catapult the group’s market share from number five to number two.

“Fortune seems the most likely as it cannot afford to lose the V&S portfolio from its distribution system.”

© db March 2007