SB Voices: Panic at Pernod Ricard?

14th December, 2018 by Amy Hopkins

Pernod Ricard has an activist investor in its midst – Amy Hopkins asks what the move means for the French drinks firm, which is standing by its plan for long-term growth.

Alexandre Ricard may look relaxed here, but has Elliott’s investment thrown a cat among the pigeons?

Alexandre Ricard didn’t – I feel pretty certain – ask Santa for a headache this Christmas, but a headache he has gotten. The CEO of the world’s second-largest drinks group was forced to defend Pernod Ricard’s profitability after it was called into question by activist hedge fund Elliott Management Corporation. Earlier this week, news broke that New York-based Elliott had built a 2.5% stake in Pernod over a number of months. The investor, known for its aggressive lobbying of company boards, accused the Jameson and Martell maker of failing to deliver best value to shareholders.

According to Elliott, Pernod’s profit margins have been disappointing, while its M&A strategy – particularly its €6 billion purchase of Absolut in 2008 – has fallen short of expectations. The group also picked fault with Pernod’s corporate governance, which it believes has been driven by a blinkered and insular approach with little outside perspective.

Alexandre Ricard hit back with a statement that offered a taste of things to come. With a dollop of diplomacy, the CEO said his firm “values constructive input from its shareholders”, but added a caveat that left little room for ambiguity: Pernod’s strategy “is working” and “is the right one” to enable “long-term value creation”.

He said Pernod’s consumer-centric model – implemented by Ricard when he became CEO in 2015 – was “yielding results”. The strategy means the group is now structured around “moments of consumption”.

Speaking to The Spirits Business last year, Ricard explained: “[This strategy] allows you to have a much more clinical approach from a strategic point of view, from an allocation of resources point of view, and from a route-to-market point of view as well.

“It allows you to activate the right portfolio of brands at the right time in the right accounts. That’s a pretty massive shift. Organisationally, our marketing teams are no longer ‘white spirits’ or ‘brown spirits’ – no, ‘moment of consumption’.”

The CEO also continued the cost-cutting work started by his predecessor Pierre Pringuet, which saw a 5% reduction in Pernod’s global workforce. Since the operational efficiency programme – dubbed Project Allegro – Ricard told SB his company is now “very clear” and “disciplined” from a “structure cost point of view”.

US muscle

But, according to Elliott, the work was not enough, and “successive operational improvement plans have failed to generate operating leverage”. The group wants to see Pernod “close the profitability gap with competitors” and has even suggested that it should “remain open” to the possibility of merging with another large spirits player, according to some reports.

Elliott may have a track record of aggressive persuasion tactics, but Pernod Ricard is proudly French and its founding family still owns the largest stake in the business – 16% – with 22% of voting rights. Belgian firm Groupe Bruxelles Lambert, which is Pernod’s second-largest shareholder with a 7.5% stake, has also reiterated its support for the group’s management, while the French government has issued a statement claiming it “wants big French companies to have stable and long-term shareholders”.

Elliott’s 2.5% may not be enough for it to muscle in change, meaning a more diplomatic approach will be needed. The two have expressed a desire for constructive dialogue, but eyes will be turned to Pernod Ricard to see how the new partnership plays out in the new year.

Alexandre Ricard is not one to shy away from challenge or change, but this will surely be one of the biggest upheavals in his short tenure as CEO.

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