Absolut pressure: Activist fund Elliott takes stake in Pernod Ricard
- Activist investor group Elliott Management Corp. announced its more than 2.5% stake in Pernod Ricard and is calling for changes in the alcohol company's management to help profit margins, according to a public statement from the fund.
- The hedge fund said the French alcohol giant with more than 140 brands has "significant potential for improvement" after recently underperforming and losing market share across its portfolio. The company's M&A has also been "disappointing" and its operating margins have been 5 percentage points lower than rival Diageo, Elliott said.
- Pernod responded to Elliott's statement in a release saying its senior management team had met with the hedge fund over the last few weeks and that shareholder engagement is a priority. "Our strategy is working and is the right one combining short-term profitability and sustainable, profitable and responsible growth under a consistent and long-term roadmap," CEO Alexandre Ricard said.
Pernod Ricard — the second largest liquor company behind Diageo — is a family business that Elliott accuses of being insular. Elliott said its analysis of the company found that insufficient corporate governance and a lack of outside perspectives have led it to underperform.
The activist fund is pushing for the company to bring in more international perspectives to expand the company's global reach. Additionally, it recommends an analysis of Pernod's portfolio, launching an improvement plan to close its profitability gap with its peers and aligning corporate governance with its competitors.
While Pernod could comply and bring in new people to silence the criticism, it might not oblige that easily since it has the French government on its side. The government already issued a statement in support of Pernod and the family owners, stating it wants French companies to have "stable and long-term shareholders...who are not subject to pressure from shareholders who want only short-term financial profitability," according to the Financial Times.
Pernod Ricard isn't the only alcohol giant facing activist pressure. In recent years, traditional beverage companies have been in close competition with craft spirits, cannabis-infused beverages and alcohol-free drinks due to shifting consumer demands, often resulting in pressure to perform. Diageo — the leader in the space — has been cutting costs to fend off activist campaigns from firms like 3G Capital and investors Nelson Peltz and Dan Loeb.
Elliott has been known to pressure other European companies through public statements. The fund has also acquired investments in media companies Sky Limited, Telecom Italia and Britain’s largest bookstore chain, Waterstones.
Some of Elliott's campaigns have turned into feuds. Although Elliott is not afraid to have a public dispute, that might not happen with Pernod Ricard. The spirits company has been in talks with the activist fund and has said it wants to appease shareholders.
Although Pernod Ricard's sales from recurring operations increased 6% in fiscal year 2018 — compared to 3.6% the year before — Elliott argues that it is still behind other alcohol giants — especially in M&A. In 2008, Pernod Ricard acquired Absolut for €6 billion ($8.3 billion) and has struggled with the brand ever since. In its most recent sales report, Pernod Ricard reported that Absolut's sales were up 2% due to success outside of the U.S. — but it was still in decline in America.
"The result has been a material total shareholder return underperformance relative to its most comparable peers, with the Company notably ranking last among its peer set over the last decade," Elliott said in the statement.
Should Pernod let go of Absolut? Other alcohol giants have turned to M&A in recent years to shed failing brands and acquire ones that are more popular among younger consumers. Diageo has sold 19 of its lower end brands and purchased Casamigos, George Clooney's fast-growing tequila brand. And Constellation has looked to sell its wine brands while investing in cannabis and women-owned brands.
With about 15% of shares and 25% of voting rights, the family behind the company that owns well-known brands like Chivas Regal whisky and Absolut vodka holds a lot of power, but that doesn't mean they are insulated from activist pressure. Pernod Ricard might be making changes in the near future to appease Elliott before the situation escalates.
- Business Wire Elliott Statement on Pernod Ricard
- Pernod Ricard Pernod Ricard responds to Elliott Management’s communication
- Bloomberg Singer’s Elliott Pounces on World’s Second-Largest Distiller
Follow Lillianna Byington on Twitter