French drinks giant Pernod Ricard (PERP.PA) bellied up to the acquisition bar on Mar. 31, announcing an $8.9 billion deal for Swedish vodka brand Absolut. The purchase puts one of the world's top-selling liquors into Pernod's cabinet, while strengthening its U.S. presence and boosting its total sales to within striking distance of Diageo (DEO), the global No. 1 spirits group.
Still, news of the deal sent Pernod shares down more than 4% on European exchanges. Investors were rattled by the purchase price, which was higher than the roughly $7 billion market watchers had expected. Another concern: Pernod's plan to finance the deal entirely with debt, doubling its debt load to more than $18 billion.
Indeed, Absolut's price proved too rich for some Pernod rivals, including Fortune Brands (FO) of the U.S., which bowed out of the bidding. Absolut is being sold by the Swedish government, which owns the vodka maker known officially as Vin & Sprit.
Premium Brands Holding Their Own
Despite the cost, Absolut represented "a tremendous opportunity" for Pernod, Chief Executive Patrick Ricard said, announcing the deal in Paris. Absolut, introduced in 1979, is now the world's No. 4 liquor brand and has a strong beachhead in the U.S., where Pernod has long sought to expand. Even after the acquisition, Pernod's U.S. sales by volume will be only about half those of Diageo. And Diageo's Smirnoff vodka will still have bragging rights as the world's best-selling liquor brand.
But it may not be long before investors warm to the deal. Absolut reinforces Pernod's dominance in more expensive "premium" spirits. Its current portfolio includes such high-priced tipples as Chivas Regal cognac and Glenlivet whisky. "Premium brands in the U.S. are holding their own pretty well" during the current economic downturn, says Pernod managing director Pierre Pringuet.
Pernod's impressive track record on takeovers also should reassure investors. The company was founded in 1975 by the merger of two producers of anisette liqueurs, including one run by CEO Ricard's father. As recently as a decade ago it was relatively little-known outside France.
Pernod's Decentralized Management Style
But in 2001, the company doubled its size overnight by acquiring more than one-third of the Seagram's drinks business. Then in 2005 it swallowed rival Allied Domecq for $14 billion. Both deals were smoothly executed and delivered promised cost savings, says Ian Shackleton, a London analyst for Lehman Brothers (LEH). Last year, earnings soared 30%, to $1.3 billion, on sales up 9.1%, to $10.17 billion.
One key to Pernod's success is a decentralized management style that grants considerable autonomy to managers of individual brands. Absolut, known for its distinctively shaped bottle and (BusinessWeek.com, 1/16/06), is likely to benefit from such freedom, Shackleton says. Pernod has already said it will retain Absolut's current boss, Bengt Baron, and will keep the brand's headquarters in Sweden.
It's pricey—but this could end up being a smooth blend indeed.