MILAN/LONDON (Reuters Breakingviews) - Ever since uppity investor Elliott Advisors turned up at Pernod Ricard late last year, Paris has been awash with talk that LVMH is lurking somewhere behind the gilded curtains, waiting to pounce on the $46 billion spirits group. The rumours reached a fever pitch in February when an equity research firm published a report detailing the potential financial benefits that might accrue from such a deal.
Truth is, mixing LVMH and Pernod would make for a weak cocktail. While Bernard Arnault’s $173 billion luxury conglomerate could afford to buy Pernod, adding more mainstream brands like Absolut vodka and Chivas Regal whisky to a super high-end portfolio of dresses, bags and hotels would dilute LVMH. Arnault’s public disavowal of a deal on LVMH’s recent earnings call is to be believed.
That hasn’t totally quashed speculation. Elliott’s demand that Pernod improve profitability has put boss Alexandre Ricard under pressure. A sale, theoretically, is one way out of the Elliott vise. And LVMH has the firepower: by stretching debt to about 3.5 times projected EBITDA of about 14 billion euros in 2020, LVMH could absorb Pernod. Or it could lead a combined assault with liquor leader Diageo, allowing it to buy back the UK company’s 34 percent stake in LVMH’s drinks arm.
Pernod makes fine tipples, even some that qualify as affordable luxuries, like Glenlivet scotch and Mumm champagnes. But Pernod’s strategy of “conviviality”, or drinks for every occasion, doesn’t obviously mesh with LVMH’s focused pursuit of the plutocracy.
And while half a dozen Pernod brands have operating margins matching LVMH’s drinks division, many are less profitable, says Berenberg, which published the report on an LVMH-Pernod deal. In its last full fiscal year, Pernod generated 26 cents of operating profit for every euro of sales. LVMH’s booze division had an operating margin of 31.7 percent in the year ending December 2018.
There are other good reasons to believe Arnault’s denial of having a hand in Elliott’s trade. His failed pursuit a few years ago of rival Hermes, using brash tactics and derivatives to build a stake, left him looking like a raider, not the charmer of the sorts of family businesses LVMH covets. If France’s richest man ever hopes to woo prized assets like Patek Philippe watches or Chanel into the LVMH fold, he can’t be fiddling around with grubby activists at the bar.
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