Pernod open to bolt-on acquisitions

Pernod Ricard has declared itself “open to bolt-on acquisitions in emerging markets or the US” following four years of self-imposed takeover purdah.

Analysts and investors are now looking for clues about where the next move might come.

Following buoyant annual results, Pierre Pringuet, the chief executive, said in Paris at the end of August that there was “no change in policy”, which was interpreted as meaning that he is not planning a “transformational” swoop similar in impact to either the Allied Domecq takeover in 2005 or the Vin & Sprit deal in early 2008.

But at the same time, Pringuet said that “debt is no longer a problem”.

By that he meant that Pernod Ricard had absorbed Absolut into the portfolio and reduced the ratio of its net debt to earnings to 3.8 at the end of June. The Absolut deal had propelled that ratio from 3.6 in late 2007 to a heady 6.2 by summer 2008.

Once the ratio of net debt fell to 4 by about the turn of last year, Pernod Ricard regained investment grade status from the crucial ratings agencies. That has the effect of lowering the actual cost of finance because lenders require a lower risk premium from a blue chip company; it has also enabled Pernod Ricard to establish a steady pattern of debt repayment over the next seven years.

Gilles Bogaert

Both Pringuet and Gilles Bogaert, the managing director of finance, say they are determined to retain that investment grade status.

Yesterday in London, Boegaert underlined that determination, saying: “Big deals are not on the agenda today.

“Clearly our priority is organic growth. I think we have now a very strong portfolio, a very good geographical exposure and we have what we need to be able to keep growing.” But he too talked of “bolt-on” acquisitions if “tactical opportunities presented themselves.”

The group has an untapped line of credit worth €1.5bn plus free cash flow in the past financial year of almost €1bn, so it could afford to spend €2bn or more if it wished without undue damage to its prized credit rating.

Boegaert says there are no significant holes in the Pernod Ricard portfolio. On tequila he said it was “not a global category”, the market being effectively Mexico and the US, and that its Olmeca Tezón brand in the super premium category is correctly positioned and capable of significant expansion.

Meanwhile, Alexandre Ricard, the new chief operating officer and chairman-elect has said that baiju is of limited appeal because the best brands are protected “almost as crown jewels”, so Beijing would bar any takeover offers.

And anyway, “category was not necessarily the most appropriate way” of looking at potential expansion, he said.

That means the most likely takeover targets are companies with strong local products and good distribution vehicles.

“The barrier in emerging markets is the route to market”, says Boegaert. “Our business model is to distribute our own brands through our own people.” The implication is that the group is looking for deals similar to Diageo’s purchase of Ypioca cachaca in Brazil.

And while Boegaert would not rule out entering a distribution deal with a major brand owner (such as Jose Cuervo if the tequila group’s negotiations with Diageo fail), that seems unlikely because of doubtful benefits to the product portfolio with lower margins detracting from Pernod Ricard’s efforts to reinforce the position of its wholly-owned products.

Vijay Mallya

“We will make mergers and acquisitions in emerging markets to boost distribution of our 14 priority brands by giving them extra route to market,” says Boegaert, stressing that Pernod Ricard is also setting up affiliates in Africa in countries such as Angola and Morocco.

“If they [buying local brands] can help to seize new occasional consumption, if they can help to improve our growth profile in emerging markets or in the U.S. we are prepared to move. It’s not so much about categories, it’s about complementarity to our portfolio attracting new consumers, new occasional consumption. It’s not so much about categories.”

But there is one brand that might be of interest in Paris – Whyte & Mackay.

The scotch brand is owned by the troubled VJ Mallya’s United Spirits group in India. Closer links with United and its massive distribution network on the sub-continent by owning Whyte & Mackay would fit the French group’s strategic objectives both in terms of route to market and in terms of short-term scotch production capacity.

And Pringuet could afford it without threatening Pernod Ricard’s prized investment grade credit rating.