Elliott Management has taken a stake in Pernod Ricard and wants the family-backed French drinks company to try to improve its performance via cost cuts and a potential merger with a rival.
Elliott said on Wednesday that its stake in Pernod Ricard was just over 2.5% – its first holding in a French blue-chip, worth around €930 million ($1.05 billion). The fund also said that it had met Pernod chairman and CEO Alexandre Ricard to discuss the way ahead.
A source close to the matter said that Elliott had sent a letter to the Pernod Ricard board asking for €500 million in cost cuts and suggesting scenarios such as a merger with a rival.
Attractive Investment Opportunities
New York-based Elliott, which has $35 billion under management and a track record of pushing hard for change in companies, said that Pernod had an "outstanding" portfolio of brands and was one of the most attractive investment opportunities in the industry.
However, it said that 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.
It also said that 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 noted, suggesting that 'operational and governance improvements would allow Pernod to unlock much of the value that the company is capable of delivering'.
A Pernod Ricard spokesman said that the group had exceeded its sales growth targets and was in a long-term strategy of creating value.
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.
The Ricard family remains the company's largest shareholder, with a 15.2% stake and 20% of the voting rights.
Long-time investor Brussels-based GBL has a 7.5% stake, while US funds Capital Group and MFS Investment Management own 9.9% and 9.8%, respectively.
Improving Governance
Elliott said that it had written to the company’s board to share its analysis and views on value creation.
Another source familiar with the matter said that 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, according to the company's website.
The 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.
Pernod Ricard has delivered underlying group sales growth of 6% in the year ended 30 June, beating a medium-term target of 4%-5% sales growth set by Ricard in 2015.
Some analysts have expressed disappointment that this sales growth has not translated into a stronger operating margin, which was 26.2% in fiscal year 2017/18 against Diageo's 31.4%.
'We see Elliott's 2.5% stake in Pernod Ricard as a material positive for the company if it leads to an improvement in operating leverage,' RBC Capital Markets wrote in a note.
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.
"Given strong recent share price performance and family involvement, we do not expect this to result in a significant change of strategy for the company," Jefferies analysts said. "However, it could lead to greater emphasis on margin acceleration, in particular from full-year 20 onwards."
Jefferies calculates that Pernod had a total shareholder return of 105% over the last ten years, whereas Diageo returned 145%, Campari 181%, and Rémy Cointreau 220%.
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