December 12, 2018 / 12:16 PM / 7 months ago

Breakingviews - Pernod Ricard served a shot of Diageo by Elliott

A glass of cognac is pictured on a bar in the Manhattan borough of New York City, November 13, 2015. REUTERS/Mike Segar

PARIS (Reuters Breakingviews) - It’s getting increasingly crowded at the bar for shareholder activists in Europe, but it’s still possible to get a good drink. Elliott Advisors, the U.S. hedge fund manager, has found another decent tipple in the form of Pernod Ricard, the French purveyor of booze like Absolut vodka and Chivas Regal whisky. 

Even though it trails its rival Diageo on some counts, the family-run firm with a 39 billion euro market capitalisation is not low-hanging fruit. It has even bested Diageo when it comes to share-price performance. But narrowing the gap on profitability, and improving governance, as Elliott urges, are worthy and achievable objectives that Pernod’s management – and family descendants controlling 20 percent of the stock – can come to share.

In their last fiscal years ended in June, Diageo managed to convert 31 percent of its net sales into operating profit. Pernod managed just a 26 percent margin. That suggests an improvement of some 460 million euros to shoot for on the 9.2 billion euros of sauce that the French group is expected to sell in its 2019 fiscal year, according to Refinitiv data.

Put those extra earnings on Pernod Ricard’s existing enterprise value multiple of 18 times, and up to 8 billion euros of extra value could be extracted, equating to a bump of some 20 percent in the stock price before Elliott placed its order. Pernod is two-thirds the size of Diageo in sales, so entirely squeezing out the difference won’t be simple, but it’s probably the chief reason the fund calls Pernod “one of the most attractive investment opportunities in the industry”.

A little extra pressure on Alexandre Ricard, the chairman, chief executive and grandson of the founder, will help. Though Pernod recently added Patricia Barbizet, a veteran independent director, the board is heavy on family members, insiders and representatives of Groupe Bruxelles Lambert, the investment company of the late Albert Frere. Adding directors with more industry expertise, and insight into growth markets like Asia shouldn’t be a stretch.

Potential improvements aside, Pernod isn’t a big laggard. Over the past five years, its shares have provided a total annualised return, including dividends, of 14.4 percent compared to Diageo’s 12 percent, Refinitiv data show. Spiked with a bit more profitability, and a twist of better governance, and Pernod could even join its bigger competitor on the top shelf.

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