Last night, Pernod Ricard held a swanky responsible drinking event at Gordon Ramsay’s Lucky Cat restaurant and bar in central London.
However, bosses at the Absolut Vodka owner are unlikely to have joined the throng of influencers, wannabes and tagalongs as they celebrated the night away. In fact, they were more likely to have hit the bar in a state of melancholy, following the news that discussions over a potential merger with US spirits company Brown-Forman had concluded without “mutually acceptable terms” being agreed.
It means Pernod Ricard has nothing to show for its weeks of negotiations with the owner of Jack Daniel’s, other than a presumably fairly hefty bill for transatlantic flights.
So, why did the two parties find it so difficult to agree a deal, and what happens next?
Rival bids
Despite the strong strategic rationale, a “merger of equals” between two proud family-run companies was always going to be hard to pull off. That challenge was only intensified when reports of a rival bid from Sazerac at $15bn pushed Brown-Forman’s share price higher.
“The two companies were stuck between Scylla and Charybdis,” quips Bernstein analyst Trevor Stirling – referring to the Greek myth of sailors getting stuck trying to navigate between two sea monsters. In the end, neither company was able to “thread the eye of the needle” and land on a deal structure that would have been acceptable to the founding families and their respective shareholders, he says.
Although it is unclear which party ultimately walked away, a $15bn deal against Pernod Ricard’s $20bn market cap looked particularly punishing on Pernod’s shareholders. It would have meant swallowing significant earnings dilution before any benefits from the synergies came into play, Jefferies analyst Ed Mundy noted, adding that he expected Pernod shares to rally as shareholders digested the news.
Shares in Brown-Forman had dipped nearly 7% after news of the talks ending broke late on Tuesday (28 April), while Pernod Ricard shares were down over 3% in mid-afternoon trading on Wednesday (29 April).
Back to the drawing board
Yet the failure to agree terms after details of the discussions were made public will be a bigger source of embarrassment for executives in Paris than those in Kentucky.
After all, Pernod Ricard was said to be the driver of initial discussions, with CEO Alexandre Ricard understood to have strongly advocated for the merger. There remained internal confidence an agreement would be reached, and Ricard will now have to explain to both employees and shareholders why his negotiating team were unable to get this deal over the line.
For Brown-Forman, meanwhile, there is still the possibility of a future tie-up with US whiskey peer Sazerac, with Citigroup analysts telling clients: “The Brown family could re-engage in conversation with Sazerac or could wait for more bidders.” Although Barclays analyst Lauren Lieberman suggested there was little appetite for fresh talks, as the company’s messaging seems to point towards “a focus on normal course operations versus suggesting an appetite to engage in talks with Sazerac”.
After licking its wounds, it seems most likely Pernod will return to its own strategy of cost-cutting and deleveraging, at least in the short-term. According to reports from Bloomberg, it began exploring a possible IPO of its Indian business earlier this month. A local listing could bring forward Pernod’s target of reducing net debt to three times EBITDA by two years to FY27, Jefferies analysts suggest, while also helping the Jameson owner navigate regulatory complexities that have weighed on its growth in India.
Whether this will be enough to quell shareholder backlash following its very public – but ultimately unsuccessful – dalliance with Brown-Forman remains to be seen.
But for now, Pernod Ricard is left nursing a hangover at least partly of its own making.
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