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Pernod gets its house in order

Pernod Ricard has been acting to rebalance its debts and its currency exposure. Two moves this week underline how the French company has its eye on making its balance sheet look as solid as possible in advance of a potential return to the takeover market, possibly next year.

Both are part of longer-term restructurings and do not conflict with the very firm statements over the past few months that takeovers are not on the agenda at the moment because debt reduction and growth consolidation through aggressive marketing are the priorities; but they are certainly sensible housekeeping in advance of an eventual return to growth through acquisition.

On Monday it sold back its 1% stake in Suntory for 4.66 billion yen (about £35m). The sum is comparatively inconsequential to the French group’s balance sheet and while Suntory will continue to distribute some Pernod Ricard brands through a Japanese joint venture, the move emphasises the imperative for a global company to control its own distribution and sales rather than rely on partners.  

That sale should be viewed in conjunction with the much more significant placing of $1bn of bonds with US investors. Multi-national companies seek to source their debt roughly in proportion to their sources of revenue.

North America is its largest market and thus the group has funded some of its debt in dollars for many years, especially as trading with many other countries, especially in Latin America, is also conducted in dollars. But that has been bank debt; this is Pernod’s first foray into dollar-denominated bonds, which are a more stable and reliable source of working capital than bank loans.

Some 37% of Pernod Ricard’s almost €9bn of debt has been provided by the European bond market – indeed it raised €1bn through an issue only a month ago. But the group wants to get the ratio of bank debt and bonds into rough equilibrium by mid 2013 when much of the bank debt raised to fund the 2008 purchase of Vin & Sprit matures.

All sensible moves, but what is impressive is that this week’s offer of 10-year bonds to US institutions was six times oversubscribed at a modest interest rate of 5.75%. While higher than the 5% coupon attached to the recent six-year European issue, this reflects the longer time horizon of the US issue and slightly different market conditions.

What is more, bond coupons are expected to rise over the next year as international interest rates go up, so Pernod has got its hands on some cheap long-term funding as well as a partial hedge against the euro declining in value against the dollar as global recovery occurs.

Much of the proceeds of the US issue will be used to repay existing bank debt but the underlying message is clear. US investors have looked at Pernod Ricard’s profits record, its ability to reduce debt rapidly after acquisitions and its growth strategy and like what they see.

The company says it has no present plans for further bond issues in the short term, but this week’s successful US placing augurs well for when Pernod Ricard decides it has spotted a profitable takeover opportunity. It will no longer have to rely on bankers or the European bond markets to raise finance.

Further, American institutions will have direct experience of dealing with the company, especially if an eventual target is itself American.

Finance on Friday, 08.04.2011

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