RI Pernod Ricard

By Saabira Chaudhuri 

Activist hedge fund Elliott Management Corp. has built a EUR1 billion ($1.13 billion stake in Pernod Ricard, calling on the owner of Chivas Regal whisky and Absolut vodka to shake up management and jump-start lagging profit margins.

The stake, of over 2.5%, is Elliott's latest big bet on Europe where it has made several investments over the past few years on companies like Telecom Italia and Sky PLC. This spring it acquired Britain's biggest bookstore chain, Waterstones.

Pernod has lost market share across various segments, including vodka, gin and some types of whisky and has "significant room for improvement," the hedge fund said. While Pernod steadily has grown sales for years, the company's margin growth has stagnated, leaving its operating margins 5 percentage points lower than rival Diageo PLC, said Elliott.

Elliott will press Pernod to set more ambitious targets to cut costs by centralizing more functions and raise revenue to improve margins, while adding new blood from the outside, according to a person familiar with the matter.

"Our strategy is working and is the right one combining short-term profitability and sustainable, profitable and responsible growth under a consistent and long-term road map," said Pernod Ricard Chief Executive Alex Ricard. Sales and profit growth from ongoing operations accelerated versus last year while cost-savings plan is ahead of schedule, he added.

Shares of the Paris-listed company were up 4.5% in recent trading.

Elliott, one of the world's biggest hedge funds, is one of the most prominent global activist investors, launching campaigns against a raft of companies including Australian mining giant BHP Group Ltd., smartphone maker Samsung Electronics Co. and U.S.-based aerospace-parts maker Arconic Inc.

The company's European foray though has seen mixed success.

Elliott is waging a bitter battle against French media conglomerate Vivendi SA over control of Italy's Telecom Italia SpA since winning a proxy battle to install new directors in May. The hedge fund, like many of its rivals, also took a hit on NXP Semiconductors NV of the Netherlands, betting incorrectly that its deal to be acquired by Qualcomm Inc. would be approved by regulators.

Elliott's European bets have been largely led by Gordon Singer, the son of Elliott founder Paul Singer, and a group of managers based in London. Elliott has been active overseas for years, but recently ramped up its public campaigning in Europe. Its approach -- often backing demands for change with threats to oust management and directors -- contrasts with what has typically been quieter campaigns by many peers on the Continent.

The Wall Street Journal recently reported that Elliott has been shifting tact to focus on a company's governance and board structure rather than margins and sales.

Elliott believes Pernod's management and board is too French and insular, while lacking diverse career experience.

Pernod Ricard had been considered safe from outside influence since the family behind it holds about 15% of shares and 25% of voting rights. The company traces its roots back to 1805 when Henri-Louis Pernod founded an absinthe distillery in a French-Swiss border village. In 1932 Paul Ricard founded his own anise-based spirits operation in Marseille. The two French companies merged in 1975.

Elliott isn't looking to oust Mr. Ricard as CEO nor to pressure Pernod to sell itself, said a person familiar with its thinking. Given the family's influence and the importance of its name to the Pernod brand, the hedge fund needs its cooperation. Antitrust issues and likely pushback from the French government around a sale of Pernod -- one of the country's best known companies -- would make a sale difficult, they added.

Mr. Ricard, on meeting with Elliott in November, was receptive to its concerns and agreed Pernod needs to be bolder, said this person.

However on Wednesday, Mr. Ricard indicated he doesn't agree with Elliott's assessment. He noted that Pernod's share price is up 37.7% over the past three years, outperforming French and European indexes. Pernod, he said, has added three directors to its board over the last three years giving it a range of experience.

The hedge fund said Pernod's EUR6 billion ($6.8 billion) acquisition of Absolut in 2008 has fallen short of expectations. Absolut, like most big vodka brands in the U.S., has struggled with fierce price competition and customer defection to Tito's vodka or other tipples like gin. Pernod in 2015 took a big write-down on Absolut, blaming a challenging U.S. market.

The Paris-headquartered company has over 140 brands, some of which aren't growing and should be sold, according to a person familiar with the matter. Elliott hasn't singled out which brands Pernod should sell but wants it to do an analysis of its portfolio.

Ben Dummett contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

December 12, 2018 10:07 ET (15:07 GMT)

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