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Activist investor Elliott faces hostility over Pernod Ricard stake

(c) Sky News 2018: <a href="http://news.sky.com/story/activist-investor-elliott-faces-hostility-over-pernod-ricard-stake-11579931">Activist investor Elliott faces hostility over Pernod Ricard stake</a>
 

Current and former chief executives of mining giant BHP, Dulux paints maker Akzo Nobel (Amsterdam: AKZA.AS - news) , electronics group Samsung and the consumer goods group Nestlé will know exactly how Alexandre Ricard feels today.

All have been targeted in the recent past by Elliott Advisors, the aggressive US activist investor, which on Wednesday announced it had built a stake of more than 2.5% in Pernod Ricard (TLO: RI-U.TI - news) - the French drinks giant behind The Glenlivet scotch whisky, Jameson Irish whiskey, Ballantine's scotch whisky, Beefeater gin, Martell cognac and Kahlua liqueur - where he is chairman and chief executive.

Mr Ricard, who at 46 is one of the youngest bosses in France's blue-chip CAC-40 index, now faces gruelling months defending the company's record against an investor whose presence on the shareholder register is usually the last thing any chief executive wants to see.

Elliott, which is said to have spent more than a year assessing Pernod Ricard's performance, wasted no time offering its critique. It accused the world's second largest spirits maker, after Britain's Diageo (LSE: DGE.L - news) , of losing market share in key areas and of underperformance in delivering returns to shareholders.

In a letter it made public, the US firm wrote: "Elliott believes operational and governance improvements would allow Pernod to unlock much of the value that the company is capable of delivering, improving the strength and sustainability of the company for all stakeholders.

"The board should remain open to opportunities made possible by an industry well positioned for further consolidation, including a merger with another large spirits player."

Elliott also pointed out that profit margins at Pernod Ricard are five percentage points lower than those of Diageo.

Its intervention is potentially explosive on several counts.

The first is that Pernod Ricard, which was founded by the merger of the anise-flavoured spirits makers Pernod and Ricard, has the feel of a family company.

Ricard dates back to 1932 and was founded by Mr Ricard's grandfather, Paul Ricard, while Mr Ricard himself is the third generation of the family to have headed the business, as his predecessor-but-one was his uncle, Patrick Ricard.

Half of the 14-member board have links to the family - something Elliott believes has stifled the business.

The Ricard family own 15% of the company but control 21% of the votes in shareholder meetings. Companies whose boards and shareholder registers are dominated by families are notoriously difficult to take control of.

Secondly, this is the first time Elliott has targeted a company in France, a country famous for protecting its companies.

Many in the City still struggle to suppress a giggle when the name of Danone (LSE: 0KFX.L - news) comes up.

French politicians from the-then President, Jacques Chirac, downwards made clear in 2005, when PepsiCo (NYSE: PEP - news) was said to be planning a bid for the yoghurt and Evian maker, that it was not for sale and that any attempted takeover would be blocked on the grounds of strategic national interest.

Danone, like Pernod Ricard, has dynastic qualities.

Thirdly, the proposal that Pernod Ricard enters a merger will have deal-makers on both sides of the Atlantic (Shanghai: 600558.SS - news) salivating.

There are few sectors in which bankers specialising in mergers and acquisitions love to do deals more than alcoholic beverages.

Pernod Ricard has itself acquired a number of businesses down the years, most famously its £7.4bn swoop 13 years ago for Allied Domecq, the Bristol-based spirits group that owned Ballantine's, Beefeater, Perrier Jouet champagne and Malibu flavoured rum.

Other big deals down the years include its 1978 acquisition of Irish Distillers, maker of Jameson; its 2001 acquisition of Chivas Regal, The Glenlivet and Martell as part of the carve-up of Seagram and its €5.7bn acquisition of Absolut vodka - a deal that Elliott says was poorly executed.

But the notion that Pernod Ricard could be in play will have bankers in New York and London dusting down spreadsheets on how it could be combined with, among others, Brown-Forman, the maker of Jack Daniel's or Beam-Suntory, the company behind the American whiskies Jim Beam and Maker's Mark, Sauza tecquila, Sipsmith gin and Laphroaig scotch whisky.

However, industry-watchers wonder whether Elliott's logic stacks up.

For a start, while it is true that Pernod Ricard is less of a business than Diageo, it is only two-thirds the size of its British rival.

The 'economies of scale', in the jargon, may not be there. And Mr Ricard has in any case taken an axe to the company's costs since he became chief executive.

Moreover, some of Pernod Ricard's underperformance of Diageo can be explained by the differing geographic territories in which the two operate. Diageo has much greater exposure to the fast-growing US market while Pernod Ricard is bigger in the more sluggish European market.

Meanwhile, although Elliott is right about Absolut - the value of which was written down by Pernod Ricard in 2014 - the takeover is regarded as ancient history by most investors, who have since moved on.

Nor is it especially obvious why Pernod Ricard is a suitable target for Elliott.

The US company recently scored a notable hit in persuading Whitbread (Frankfurt: WHF4.F - news) to separate its Costa Coffee business from its hotel and pub restaurant businesses but Pernod Ricard is not really a break-up candidate.

Spirits companies grow profits by investing in the marketing and distribution of their brands, not by cutting costs, so the French group is scarcely suitable for financial engineering either.

Above all, the dominance of the Ricard family and Pernod Ricard's status as a French national icon will make it practically impossible for it to affect change without the co-operation of Mr Ricard and his family.

Elliott said yesterday that it has met Mr Ricard but he hit back immediately with an interview in which he told the Financial Times that "Pernod Ricard is a beautiful success story based on very strong family values".

And the French establishment is already closing ranks. The French government has issued a statement insisting it "wants big French companies to have stable and long-term shareholders".

We hear a lot about culture wars in this day and age. In the world of business, a grand old French company and a ferocious US activist is as big a culture clash as you can get.