Pernod wins Absolut vodka

PARIS/STOCKHOLM (Reuters) - France's Pernod Ricard (PERP.PA) has won the battle to buy the maker of Absolut vodka, in a costly 5.63 billion euro ($8.9 billion) deal that brings it nearly level in sales with global spirits leader Diageo (DGE.L).

Pernod shares stumbled as the market baulked at the price, which was far higher than the $6-7 billion estimated by the market even before the worst of the past few weeks' financial turmoil, and at the hefty debt needed for the deal.

Pernod beat the favorite, Jim Beam bourbon maker Fortune Brands (FO.N), to win control of Sweden's Vin & Sprit VSG.UL, owner of the fast-growing Absolut brand, and gain a bigger presence in the U.S.

Diageo had pulled out of the auction in February.

Analysts at HSBC called the deal a "master stroke", but said the high cost proved there were no cheap opportunities left in the rapidly consolidating drinks sector.

Pernod shares were down 4.5 percent at 65.05 euros at 11:25 a.m. EDT. The stock has fallen 18 percent this year, underperforming the food and beverage sector .SX3P by almost 8 percent.

"The combination of a full price and the amount of debt to be raised definitely seems to have unnerved certain investors," said Stephen Surpless, senior analyst at Cantor Fitzgerald.

"While vodka has been a growth market over the past few years, this may be the top of the cycle in terms of multiples paid," he added.

The sale of V&S is the centerpiece of Sweden's largest-ever push to privatize state assets and is Pernod's biggest move since it bought Britain's Allied Domecq for $13 billion in 2005.

The company said a 12 billion euro syndicated loan would pay for V&S and refinance existing Pernod debt.

HIGH COSTS

Pernod Chief Executive Patrick Ricard acknowledged Absolut was an expensive brand but said this was necessary to fill a portfolio gap and promised to get debt levels down quickly.

"The brand is for sale when it's for sale. You buy it when it's for sale or you miss it," Ricard told Reuters.

Ricard said the deal brought debt levels to about six times earnings before interest, tax, depreciation and amortization (EBITDA), which he said was exactly the same as for the Allied Domecq deal, and before that the Seagrams buy.

Pernod Ricard said after the deal annual volume sales would total 91 million 9-litre cases of spirits, up from 75 million before, putting it just behind Diageo's 93 million.

But CEO Ricard said being number one was not the first goal.

"We have a big debt. So the first goal will be to deliver the synergies, to make the cash flow and to reimburse the debt, to go back to where we are today," he said, referring to debt levels of about 3.5 times EBITDA.

He declined to say how long that could take, but said it would be done quickly.

Pernod said the deal valued V&S at 20.8 times 2007 gross operating profit, or 14.2 times after synergies from the deal.

"We got a very good price, to the benefit of the public economy, as well as a very good industrial home for the company," Mats Odell, Sweden's Financial Markets Minister, told reporters in Stockholm.

"The businesses will remain intact, and both production and marketing will continue in Sweden and the Nordic region."

Pernod Ricard said it expected synergy benefits of 125-150 million euros before tax, with no impact on earnings per share in year one but a significantly positive effect afterwards.

ICONIC BRAND

Absolut is the jewel in V&S's crown, with sales of 10.7 million 12-bottle cases in 2007. It is the world's fourth best-selling international spirit brand behind Diageo's Smirnoff vodka, Bacardi rum and Diageo's Johnnie Walker scotch.

"It is an iconic brand ... which has strong links with creativity and modernity and a unique angle," Pernod Finance Director Emmanuel Babeau told analysts in a conference call.

"We expect Absolut to have a moderate growth rate in the U.S. and strong growth outside the U.S.," he said, when asked about the impact of a slowdown in the U.S. economy.

V&S was formed in 1917 as a national monopoly for the production of alcoholic drinks. But it was not until after exports of Absolut to the United States began in 1979 that the brand took off internationally.

The transformation of Absolut into a global powerhouse has since been used as a case study in branding.

Pernod was keen to buy a leading vodka to fill a hole in its drinks portfolio, but kept its options open by talking to the Russian authorities about buying the rights to Stolichnaya outside Russia, where it already distributes the brand.

Pernod said the V&S deal would eventually mean the end of its distribution of Stoli.

Pernod also has given two years' notice to quit the Maxxium distribution venture, and Managing Director Pierre Pringuet told Reuters the exit costs were likely to be in the range of 20 million euros.

Fortune Brands, considered the front-runner for Absolut due to a U.S. distribution deal that runs to 2012, said it would begin repurchasing its own shares after the auction defeat.

Sweden said the deal would not close before the summer.

It said Pernod was buying all of V&S except the Swedish firm's 10 percent stake in Beam Global Spirits & Wine. The Swedish state will sell the Beam shares in a deal with the firm's principal owners during the coming months.

Deutsche Bank and J P Morgan advised Pernod on the deal.

(Additional reporting by Blaise Robinson, Tim Hepher, Amy Kraft and Adam Cox, editing by Will Waterman)