July 4, 2019 / 3:19 PM / 19 days ago

Breakingviews - Elliott pounced on the wrong booze company

Bottles of Ricard's aniseed-flavoured beverage are pictured at the Ricard manufacturing unit in Lormont, near Bordeaux, France February 15, 2019. REUTERS/Regis Duvignau

LONDON (Reuters Breakingviews) - Will that be Absolut or Smirnoff in your Cosmopolitan, Madame? Investing can be as simple as ordering a drink at the bar. But as with the after-effects of certain cocktails, the results can vary.

Consider the stock market performance of the world’s top two spirits makers: Diageo and Pernod Ricard. Both have performed well since Elliott Advisors bet 1 billion euros that it could pressure Pernod into being more profitable and better run. Yet the activist would have done better with a chill investment in Diageo.

Since December 11, the day before Elliott disclosed a 2.5% stake in the Paris-based enterprise whose anise-flavoured aperitif is synonymous with French “joie de vivre”, Pernod shares have returned about 17%. That compares to about 21% for France’s benchmark CAC 40 index.

If Elliott paid about 141 euros a share, the 30-day average before it went public with its campaign, the firm led by Paul Singer would record a gain of around 174 million euros. Had it chosen 83 billion pound British spirits rival Diageo, whose shares have returned 24% in the same period, Elliott would be sitting on an extra 69 million euros of profit. If the fund also shorted Diageo to hedge its bet on Pernod its return would likely be lower.

Best of all it wouldn’t have needed all that lobbying of Pernod Chief Executive Alexandre Ricard, whose grandfather invented the pastis recipe that made the family fortune. Since Elliott arrived, complaining of lower profitability and poor governance, the Chivas Regal maker has started looking at ditching its wine business, sources told Breakingviews. That would help lift its operating profit margin to above 32%, closer to Diageo’s 35% – assuming the disposed unit performed in line with the listed Treasury Wine Estates.

Pernod also appointed veteran executive Patricia Barbizet as lead independent director, partly addressing Elliott’s complaint about the weaknesses of its family-dominated board. This has arguably helped the shares perform in line with the broader market, but not much else. 

Pernod trades at the same 10% discount to Diageo on an enterprise value-to-EBITDA basis as it did in December. Some of that’s structural: Diageo is much larger in the more efficient U.S. market while Pernod has prioritised exposure to India and China. It’s not obvious why Pernod has underperformed its larger rival, but for investors sizing up the value of activism, it may be worth figuring out.

—The fifth paragraph has been corrected to show that a sale is being considered, according to sources, rather than having been announced by Pernod Ricard.

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