Glenboden M & A Originations

Potential secondary M&A moves after Pernod acquisition of Absolut

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Origination Status privatisation through trade sale agreement signed in March 2008
Asset V&S Group (Sweden), owner of global no.2 vodka brand Absolut
Buyer Pernod Ricard (France), global no.2 in wine & spirits
Seller Vin & Sprit A/S (Sweden), 100% state-owned company in Sweden
Buyer Rationale strong global premium vodka brand, global catch-up with Diageo
Seller Rationale revenue for state budget and debt repayment, timing
NBs Pernod estimates post –synergy P /EBITDA to be 14,2
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You can always rely on a French company to put strategic vision before financial calculation, i.e. to overpay in a bidding war. Pernod has vigorously defended the valuation, by referring to multiples post –synergy and of ‘contribution after advertising and promotion expenses’, but the fact remains that the price tag is about € 1 bln higher than expected a year ago. Moreover, this huge deal is certain to have significant after –shocks in the global spirits industry. Pernod has already announced some brand divestments and buyers include Campari; Bacardi as a loser in the bid could try to keep momentum by making an acquisition elsewhere (e.g. CEDC); Fortune Brands is now looking quite vulnerable.

Did Pernod really overpay ? There are no clear comparable transactions this cycle, but a x5 Sales multiple compares with x3 Sales for both Svedka and Parliament, brands with a >20% growth rate in the US and Russia respectively. Absolut delivers only 60% V&S sales, with the group not growing as a whole in 2007. On top of that are the sunk costs of investments made by Pernod in Stolichnaya vodka, which it will cease to distribute now, as well as potential early termination costs of Absolut vodka distribution contracts with Future Brands in the US and Maxxium in RoW.

Then there’s Pernod’s leverage ratio increasing to x6 EBITDA, as a result of this deal, which is for example twice as high as Heineken’s after its deal with Scottish & Newcastle. For this reason, and not only to avoid brand cannibalization in its enlarged portfolio, Pernod will make some divestments in order to raise cash. It has already announced plans to sell the Plymouth Gin and Fris vodka brands, that came with Absolut. Additional brand sales are likely to follow, to reduce net debt further. Campari has already announced its willingness to pick up these ‘left –overs’ and other brands.

Bacardi must be very disappointed to have lost the tender for Absolut, since it would have fitted very well alongside its super-premium vodka Grey Goose. They will have the momentum now to make an acquisition elsewhere; Glenboden’s tip is for them to buy Poland’s CEDC which, as a top 6 global vodka supplier by volume, would fill that big gap in Bacardi’s portfolio.

The real loser in this situation, in our opinion, is Fortune Brands. From the start, we predicted that Fortune would fail in the Absolut bid; the consequences of that failure however may be greater than expected. Nearly 50% of Absolut sales are in the US, where it’s distributed by a Fortune -controlled JV, so losing that business (in 2012 latest) will be a significant blow. Also, the group has lost a golden opportunity to become a serious player beyond the USA, in the 13 other markets where Absolut’s sales are growng mostly in double-digits.

Financially, the group had geared itself up for buying Absolut, notably through the sale of its premium wines portfolio to Constellation Brands at the end of 2007. Now, in the wake of its failed bid, Fortune has just announced a share repurchase programme, as a way to soak up that warchest. These factors, together with the fact that 90% of Fortune’s sales come from brands with no. 1 or 2 market positions, make the group look like it’s not investing for the long term and is milking what it has.

This emerging profile, plus the current weakness of the US$, makes Fortune look like the next global spirits consolidation candidate.

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THIS LEAD'S VALUATION
Size (€ mln) 5.600
Sector spirits
Asset Quality global no.2 branded
Seller state
Buyer large plc
P/S 5,0
P/Ebitda 20,8
Type enterprise value
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