How rumours of a Pernod Ricard takeover are boosting the drinks giant’s share value

Oh, how stock markets love a rumour: a spate of speculation leads to share price oscillation and the chance to make a killing.

Just look at what happened to Diageo’s shares four years ago. A single, never confirmed, article in one Brazilian publication sent the shares jumping by almost 10% in a day.

The hope – and it was never more concrete than that – was that Jorge Paulo Lemann, Brazil’s richest man and head of AB InBev, and legendary US value investor Warren Buffett, were about to launch a break-up bid for the world’s biggest premium alcohol beverage group.

Lemann, so the article speculated, would fold Guinness into AB InBev while Buffett and his team would work their cost-cutting magic on the spirits portfolio.

It never happened, even if Lemann and Buffett had made initial calculations – which they almost certainly had. All groups periodically “run the numbers” on their rivals.

Diageo, under the then relatively new chief executive Ivan Menezes, had just put in place several strategies which have since paid off and its share price has added about 50%. So those investors who leapt on the rumour bandwagon and hung on have enjoyed the ride, especially as Diageo has since steadily increased its dividend and undertaken a hefty share buyback programme.

Is something similar about to happen at Pernod Ricard?

U.S. activist fund Elliott revealed in December it had spent around €930 million (£809 million) to build a stake of just over 2.5% in the world’s second-biggest spirits maker.

Elliott wants Pernod Ricard to raise profit margins to bring them more in line with larger rival Diageo’s and improve its corporate governance. The Ricard family hold about 14% of the shares but control 20% of the votes.

That has put chief executive Alexandre Ricard under some pressure because despite a raft of cost savings and a series of solid and improving results over the past couple of years, the French group gives the impression of having to run ever faster just to keep pace with Diageo.

One analyst, Berenberg, published calculations suggesting that Pernod Ricard could boost shareholder returns by 20% over time. This included selling off its wine division and further disposals of under-performing lines.

In February Ricard met the Elliott team and pledged to lift the French group’s margins and shareholder returns in a three-year strategic plan that Elliott described as a “first small step”.

Ricard also said was a “consolidator”, despite quietly disposing of his Argentine wines.

But the rumour machine was rumbling. Now that Pernod Ricard was in the spotlight, would LVMH, the world’s biggest luxury goods group, be about to lead a break-up bid. And might Diageo be an interested party?

In late January, Bernard Arnault, France’s richest man, said he did not want to destabilise Pernod Ricard and that he had nothing to do with Elliott buying a stake in the French spirits group. Diageo has never commented.

But despite the denials, the speculation will not go away and Pernod Ricard’s shares sit at a record high.

True that has much to do with its continuing performance, Ricard’s confidence in increasing his guidance on this year’s results and the appearance of Elliott on the shareholders’ register.

Even so, still some believe Arnault might be lurking. LVMH encompasses the Moet champagne empire, Hennessy cognac and Glenmorange scotch whisky among other luxury drinks. In fashion, luggage and hotels it espouses the very highest of luxury. Would many of Pernod Ricard’s brands complement that image?

The Glenlivet and Chivas Regal scotches would be a reasonable fit, but what about Absolut vodka, the Irish whiskies and pastis? Fine brands but not as aspirational as M. Arnault. Jacob’s Creek and Campo Viejo hardly sit well with Cheval Blanc and d’Yquem.

Many of the Pernod Ricard brands that might come under the hammer, according to the break-up theorists, are unlikely to interest Diageo.

It has exited wines and around the world competition authorities would raise their eyebrows about more of the scotch industry falling into is lap. In Smirnoff it has the best selling vodka so Absolut (and its problems) are of little interest. However, despite setting up its own Irish whiskey production, the Jameson range would be an obvious attraction.

In addition, a deal with Diageo, the optimists speculate, would allow LVMH to take back the 34% Diageo owns of Moet Hennessy. But there is no commercial reason why Menezes would want to sell his stake in the champagnes and cognacs. They pay a good dividend (so he is already earning a good return on the capital invested) and he will never be able to buy a stake in either sector with sufficient volume to give him global reach – unless Arnault would be willing to sell Moet and Hennessy to him!

According to Berenberg, LVMH’s drinks arm has an operating margin of 31.7% while Pernod Ricard’s is about 26%. That’s the room for improvement that Elliott has identified. But Arnault had his image tarnished a few years back when he waged a public battle for Hermes and he is unlikely to wish to descend from his pedestal when luxury assets such as Chanel and Patek Philippe might be charmed into his luxury group.

And beneath the surface lurks the French government. Pernod Ricard is a constituent of the elite CAC30, the index of the biggest companies quoted on the Paris stock market. Would the Elysee demur quietly as a flagship company disappeared?

So those buying into Pernod Ricard shares should be prepared to rely on pressure from Elliott and his own ambition to one day eclipse Diageo to see Alexandre Ricard produce results similar to those enjoyed by Diageo in the wake of a single speculative comment four years ago.