Glenboden M & A Originations

Acquisition options in super-premium spirits for a resilient LVMH

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Origination Status buyer announcement of acquisition, December 2008
Asset Champagne Montaudon (France), small family-owned champagne brand
Buyer LVMH Group (France), no.1 global luxury products company
Seller Montaudon family
Buyer Rationale opportunism, legacy brand to expand champagne portfolio and increase reserves
Seller Rationale acceptable valuation, challenges of international expansion and trademark protection
NBs CEO of LVMH says group will continue to ‘seize opportunities for external growth’
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The fact that LVMH is prepared to acquire such a small champagne brand as Montaudon, when its portfolio already includes such global stars as Moet & Chandon and Mercier, underlines the group’s opportunistic approach to buying assets. With the global economic slowdown set to affect independent and indebted spirits producers harder in 2009, and given LVMH’s strong balance sheet and resilient operating performance, we can expect further super-premium and luxury drinks brand acquisitions by the group next year. We look at criteria and selected candidates in the spirits category.

Wine & spirits constitutes just under 20% of LVMH’s total revenues. Although that segment booked only 6% organic turnover growth in H1 2008, when the group’s average was 12%, its operating margin exceeds 30% against a group average of only 20%.

Complying with the orthodoxy that one should support the business with the highest profitability, LVMH should be prioritizing wine & spirits for investment including acquisitions. With a net financial debt to EBITDA ratio of less than 1,5, at the end of H1 2008, LVMH Group also has the balance sheet strength for more acquisitions at this time.

As for acquisition candidates, the group may be spoilt for choice in this environment. The problem will be to select targets that will genuinely complement the group’s existing portfolio, and to which it can add value in terms of an accentuated luxury positioning. This will not be easy, but candidates do exist.

Pernod Ricard is a group that, after acquiring Absolut earlier in 2008, has increased its indebtedness to nearly x6 EBITDA and is now divesting some brands to redress this. There are several Pernod brands that would complement LVMH’s spirits portfolio, which is thus far limited to Scotch whisky and Polish vodka. However, Pernod has invested heavily in positioning its brands as premium ones; that could make it more difficult for them to be traded up to luxury or prestige status by LVMH.

In far greater financial trouble than Pernod is the Belvedere group, which is attempting a financial rescue after defaulting on bank covenants. However, its biggest asset, the Sobieski vodka brand in Poland, would probably not sit comfortably next to LVMH’s existing luxury Polish vodka brands, Belvedere (sic) and Chopin. Belvedere group also owns the William Peel Scotch whisky brand, but that category is stagnant or in decline in the brand’s core market of France.

Better fitting tips for acquisition by LVMH, in our view, are Russian Standard (vodka), Tullamore Dew (Irish whiskey) and Mount Gay (rum).

Glenboden has drawn attention to Russian Standard, in the past, as an upcoming super-premium vodka with a strong authenticity angle. Owned by Russian entrepreneur Roustam Tariko, the brand has been launched aggressively around the world, with strong growth achieved in the US in particular.

It’s arguably been conceived and rolled –out with a speed and slickness that suggests it’s being teed up for sale to a global major one day. The proceeds from such an exit would certainly allow Tariko to focus on his core business, consumer finance in Russia, which has huge growth prospects but will require a lot of capital to see it through the downturn.

Tullamore Dew is another fast-growing brand, sold globally, with a good authenticity story (as an Irish whiskey). Owned by a financially troubled drinks company, C&C, the brand could become available in the event of the split up of that group. It might fit well alongside LVMH’s flagship Scotch whisky brand, Glenmorangie, which the group acquired in 2004 and which it now refers to as one of the ‘rising stars’ in its portfolio.

Finally we turn to Mount Gay rum, currently owned by Remy Cointreau, a group best known for its flagship cognac and liqueur brands. Remy experienced very modest organic growth in revenue and operating profit in H1 2008 and, with an operating margin of just over 15% in that period, the group’s underperforming by global spirits standards.

Furthermore, Remy’s exit from the Maxiuum distribution alliance means it will incur both a compensation charge of over € 200 mln and significant costs in building its own network to cover nearly 40 countries. The group’s latest syndicated credit includes a provision restricting its net debt ratio to x3,5 EBITDA until 2012; currently this ratio is nearly x2,5 so Remy has limited room for manoeuvre.

The sale of Mount Gay might be financially attractive to Remy Cointreau at this time, without being strategically damaging. The brand recorded double-digit growth in the US in H1 2008, and has grown strongly in other markets like the UK and Australia, but it still constitutes less than 15% of the group’s total revenues, so it can be described as non –core.

It could be very attractive to LVMH; that group does not yet have a rum brand in its portfolio, and the luxury potential of Mount Gay is underlined by its association with the yachting and sailing worlds.

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