Pernod Ricard and Campari moves offer clues over intentions

The deal in which Pernod Ricard is selling Wild Turkey Kentucky bourbon and Wild Turkey American Honey liqueur to Gruppo Campari says much about the intentions of both companies over the next few years.

Campari, which is controlled by the eponymous family, will use the $575m acquisition to create critical mass, especially in the American market, while the French group is focusing on restructuring its balance sheet and paying down its €13bn debt mountain following last year’s €5.59bn takeover of Vin & Sprit.

Buying Wild Turkey, which sells about 800,000 cases a year and increased its turnover by about six percent in 2008, means that two thirds of Campari’s sales will be outside its Italian home market. Half of Wild Turkey’s volumes go to the US home market, with major export markets in Australia and Japan where the brand will also give significant leverage to the Campari portfolio, which includes the pink aperitif, Cinzano, Glen Grant and SKYY vodka. Eventually Campari intends to create its own distributor in Australasia, but will continue to use Pernod Ricard’s network for the time being.

Campari’s chief executive Bob Kunze-Concewitz effectively ruled out further purchases in the medium term, saying: “We will focus on digesting the Turkey.” Earlier this year, Kunze-Concewitz said the group was looking to spend about €600m  – and he has more than done so. Campari’s net debt will rise to about €760m when the deal is concluded in early summer. Analysts said the price being paid was fair to both companies, being equivalent to about 12 times expected earnings in the 12 months immediately following the deal.

Pernod Ricard had already committed itself to raising €1bn within a year through disposals following last year’s takeover of Vin & Sprit, which brought Absolut Vodka into its portfolio. Selling Wild Turkey, a brand it had owned for about 30 years, means it has achieved about 60% of that target following the disposals of Bisquit cognac, Glendronach whisky, Cruzan rum and various Scandinavian brands as demanded by Brussels. That begs the question of what else it will sell from its non-core portfolio. Plymouth Gin, which came as part of the Vin & Sprit portfolio, had been said to attract Campari, but that possibility seems to have been ruled out. Tia Maria, the coffee liqueur, is another possible candidate for sale.

What concerned investors, however, was the simultaneous announcements of a dismal third quarter’s sales for the French group, a second lowering of its profits forecast within a couple of months and the unveiling of a €1bn rights issue to shareholders, one of the largest in Europe since the credit crunch struck.  

The call for extra capital from shareholders plus the proceeds of the sales will help the French group to lower its debt profile and reduce the margins it pays. Effectively it is borrowing “free” money from shareholders, (part of next year’s dividends will also be paid in shares rather than cash). The timing, however, worried analysts, who said it implied a degree of uncertainty about Pernod Ricard’s evolution over the next few quarters. Emmanuel Babeau, the finance director, responded by saying that Pernod Ricard “knows absolutely, for sure, how we are going to finance the group and at what cost until 2013.”

The Ricard family will not take up the rights issue but agreed to buy out the 3.74 percent stake in the company held by Japanese brewer Kirin Holdings, increasing the family’s overall stake in Pernod Ricard to 16.17% of the capital, up from 12.5%, and 22.02% of the voting rights, up from 19%.

The third quarter results were disconcerting. Organic growth fell by 13% compared with the first three months of 2008, partly because of technicalities such as the date of Chinese New Year, but also because of larger-than-expected destocking by wholesalers and distributors, although this was also said to be due to technical reasons rather than reflecting slower sales to the consumer. Nevertheless, Pernod Ricard has lowered its forecast of organic growth from recurring operations for the full year to the end of June to between three percent and five percent. Previously it had predicted growth of five percent to eight percent. That said, the group is sticking to its forecast of net profits from recurring operations growing in double digits and topping €1bn for the first time.

Finance on Friday, 17.04.2009