July 25, 2008

Scrutineer: Pernod’s Absolut Success

By Martin Flanagan

Pernod Ricard

58.68 +1.73


371.25p +2.5p

PERNOD Ricard, Scotland's second-biggest whisky company through its ownership of Chivas Bros, has clearly established its expansionist credentials since the turn of the millennium.

Although it was already in the top six of the world's spirits and wine companies in 2000, it has since made three transformational acquisitions.

First there was the multi-billion carve-up of Seagram that Pernod did in conjunction with Diageo in 2001.

Then came the mega-takeover of Allied Domecq, the world's second- biggest spirits and wine group, in 2005.

Yesterday came another multi-billion pound deal with Pernod's takeover of Vin & Sprit, the Swedish drinks major whose flagship is Absolut vodka.

It has been a virtuous circle for the French drinks giant. Synergies are shaken out of the acquisitions, largely through de- duplication and economies of scale that translate as extra buying power.

These synergies help the arithmetic for the deals to stack up in the first place, and then along with strong organic cash flow at the enlarged Pernod the company is able to plough more investment behind the promotion of its brands.

These range from Ballantine's, Chivas Regal and The Glenlivet whiskies to Beefeater gin, the aniseed-based Ricard so redolent of southern France and Martell Cognac (and now Absolut vodka).

Pernod's 1 billion (GBP 788 million) sale programme of some profitable, second-tier brands announced yesterday should quieten the concerns of investors who had become worried about the company's 11.9bn of debt.

Even apart from that debt reduction drive, however, the strategy of concentrating on fewer, bigger brands is now a classic template for the worldwide drinks industry, from Diageo to the former Scottish & Newcastle (carved up this year by Heineken and Carlsberg).

The big boys plough ever greater promotional and marketing spend behind flagship brands to drive up premium sales. And they do not have the distractions of supporting and developing minor brands that are never going to hit the big league of what the trade knows as "affordable luxury" and James Joyce called "Duchess's urine".

On the organic front, Pernod is also pas mal. Even in the past year's gathering downturn, it has managed a 2.2 per cent rise in annual group sales to 6.59bn.

The year has not been without its problems, however. The earthquake in Sichaun in China contributed 1 per cent to the 3 per cent fall in revenues at Pernod in its fourth trading quarter to end- June.

Touchingly, many Chinese people felt it was inappropriate to be going out to bars drinking in the wake of the quake, even in cities far removed from the region affected.

Meanwhile, the increase in excise duties in Alistair Darling's March Budget contributed to growth in UK spirit sales falling from 6 per cent up to then to 2 per cent in Q4.

Pernod also admits to a cultural problem selling whisky in China, where cognac is seen as a more aspirational drink.

Fortunately for a French-domiciled group, the sluggish French market for drinks in recent years does not now matter so much as Pernod only has about 9 per cent of its sales on its home turf.

The company may have run out of major consolidation opportunities (like bigger rival Diageo), but its progress has been eye-catching in the past decade.

AVIATION recessions are never good news for engine-maker Rolls- Royce. A weak US dollar, rising commodity prices and energy costs, and the GBP 36m cost of laying off 2,300 staff have also not helped recently.

But, despite this, the company yesterday reported an 8 per cent lift in underlying first-half profit to GBP 410m and hiked the divi up 42 per cent to 5.72p, which Rolls-Royce said would prove to be about 40 per cent of the yearly payout.

Sir John Rose, group chief executive, was a little more bullish than you might expect given the unhelpful backdrop.

He believes R-R is well-placed to exploit the resurgent civil nuclear market, which he says will generate new-build and servicing opportunities.

R-R also takes comfort from a record order book of just over GBP 53bn - up 17 per cent on a year ago.

Some resilience is also provided by the fact that the company now gets half of its turnover from servicing its engines rather than making them for currently depressed markets.

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