Pernod Ricard eyes more acquisitions
Pernod Ricard has declared itself on the mergers and acquisitions trail once again.
This month, both Pierre, the chief executive, and his nominated successor, Alexandre Ricard, the present chief operating officer, said the company has the ability pursue bolt-on acquisitions as opportunities occur. They were also careful to say that in the longer term nothing is ruled out (including a possible blockbuster takeover).
In the short-term, Pringuet said, the French drinks group could easily afford to spend €1bn (about £850m) without damaging its Investment Grade credit rating. Maintaining that financial status is central to Pernod Ricard’s strategy following almost a decade of paying down high levels of debt incurred to finance expansion via acquisition.
In 2005 the group took over the lion’s share of Allied Domecq and it had barely reduced its borrowings to more normal corporate levels when it won the battle for Vin & Sprit in 2008. That brought the transformational Absolut vodka brand into its stable.
Absolut now sells 11.6m cases, almost double that of Ballantine’s scotch, Pernod Ricard’s second biggest volume seller. But landing Vin & Sprit also meant that just as the world was about to plunge into financial crisis, Pernod Ricard’s net debt soared to 6.2 times its annual earnings (earnings before interest, tax, depreciation and amortisation).
To achieve Investment Grade status, a company’s debt-to-earnings ratio must be no higher than 4. If it exceeds that ceiling, its corporate bonds are classified as “junk” and big American savings institutions, especially pension funds, are barred from investing in them.
Pernod Ricard has a strong record of beating its own targets for reducing debt. Such was the impact of winning Absolut on it fortunes (especially as it increased its profits and dividend each year following the deal) that the company regained Investment Grade status 18 months ago.
Then in the year to the end of June the group reduced its debt by €636m, bringing its earnings-to-debt ratio down to 3.5. And Ricard was adamant at a London briefing that the company would continue to bring the ratio down further. “Debt is no longer an issue”, he said.
Not only has the company told investors and the financial markets that retaining Investment Grade status is central to its business plan, but also it has restructured its finances in such a way that doing so is imperative. Today 88% of its gross debt is financed by bonds, a large chunk of which is held in America. So any threat to its standing through a rapid increase in borrowings would come at a heavy price both financially and reputationally.
That is why both Pringuet and Ricard are careful to play down the prospects of a mega-deal in the immediate future. The more the debt is reduced in the medium-term, the greater the financial scope and flexibility further down the line.
Not that Pernod Ricard has been in financial purdah. Earlier this year it made the significant acquisition of Le Maine au Bois in Cognac, adding both vineyards and maturing stock to Martell’s armoury.
But the next deal will almost certainly be driven by a desire to gain more of the US spirits market. Ricard said that the US provides 40% of the industry’s annual profits but only about 25% of Pernod Ricard’s. So while further expansion in emerging markets is inevitable to drive growth, gaining ground in America is imperative.
“We are under-exposed to the US market,” Ricard said. “We are no longer sub-scale there, as we were before the Absolut deal, but America is definitely worth looking at from an M&A point of view.”
Beyond that the company will say nothing, but the significant gaps in its portfolio are bourbon and tequila. Faites vos jeux.